Thursday, November 08, 2007

The weak rupee policy

The Fed cut rates, and India appears to have responded by raising the limit on MSS issuance by RBI. Let's chalk out the rough fiscal costs --

  • Each month with over $10 billion of MSS issuance uses up Rs.40,000 crore of bond issuance. Roughly speaking, assuming a net cost of 4%, a stock of MSS of Rs.250,000 crore runs up a tidy cost of Rs.10,000 crore a year.
  • In addition, assuming India has roughly $125 billion in USD assets, each 1% depreciation of the USD is a cost of roughly $1.25 billion or roughly Rs.5,000 crore on account of depreciation of the reserves portfolio.

Ila Patnaik looked at monetary policy in Indian Express a few days ago.

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