Some how I never understood, how can inflation rise so steeply when the rupee is also increasing fast in last 3-4 months. In other word if you look at it, we can say inflation is far more then what we understood because we should add rupee apprecetion to it.
Another things is, If rupee increases fast and keep on doing so, dose this mean that FII will not be intrested to take there money out of indian stock market because they get double returns. Again fresh buy/sell from FII will have less impact. If rupee is going to increase furhter then non-IT stocks should see steep price rise
RE:inflation and rupee value
by Ajay on Jun 20, 2007 07:09 AM Permalink
In a perfect economy, and all economic theroy is about perfect markets, we all want to maximise our retrn.
So when interest rates go up for a particular currency people would exchange their currency to the hight interest paying currency so they can earn higher retrn - interest.
So when rates go up, people save more - put money in fixed deposits, reduce spending - thus reduce money supply in the market. everyone wnats to convert to this high yield - one which pays more interest currency and thus it becomes more valuable.
Rupee is not exactly a fully convertible currency but people like me are to blame being a PIO i am allowed to create a FCNR acount and save money here. It pays me more to save in India, even if i do not convert it to Re. USD Interest rate in India is 5% while it is only 4.25% in US.
So there are others who sensed a boom in property market and sent money to india to buy property. hey converted USD to Re. This increated money supply as more Re were added to market. Now, Increated monet supply invariably causes inflation, which we saw over past few month and to tame this central bank can either increase CRR - cash reserve ratio - money banks need to keep with central bank - RBI as security or the overnight lending rate is increased. Which increates your interest rates. Depending on market mood this reaction can be exggerated.
