The RBI governor YV Reddy has overcome several intricate problems that would have flummoxed the best of the best in the business of managing the finances of a country such as ours.
Circa 1997, the Asian Financial crisis ravaged the entire South Eastern economies. So much so that Russia defaulted on its debt (fallout was LTCM bailout). However, India was spared, thanks to the astute policies of the then Finance Minister Dr. Manmohan Singh and his round table. Unlike the SE Asian countries that had the deadly combination of pegged exchange rate and CAC (Capital Account Convertibility), India followed managed float.
The vicious cycle of external funds:-
FDI à $$ à RBI buys $$(to manage USD/INR) à inflow of Rupee à increasing liquidity à inflation à increasing CRR / interest rates à increasing FDI / FII to tap high yields
What RBI can do is follow global best practices from say China and Singapore. What if RBI stops buying dollars from the open markets? It starts accumulating USTs or starts buying into sovereign issues of Euro and UK. This will help in diversifying the reserves in other currencies and hedge against depreciating dollar.
Another solution on which the government needs to act fast is creating our very own investment arm. Let’s name it ‘Global India Alpha Fund’J. On the lines of Teamasek it will be managed by professionals and would not be run like an typical politburo office. It will identify global opportunities and invest in them. At the same time support Indian India inc. in global acquisition.
It does not equate the problem of inequality of the ‘Impossible Trinity’ but comes real close to it. We have INR within a manageable band, free capital movement (on a good pace to Full capital account convertibility) and at the same time an independent monitory policy (though not fully independent).
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