Tuesday, May 22, 2012

The Rupee’s Fall: Don’t Underestimate the Power of the State

Those who underestimate the absolute power that a state commands do so at their own peril. Ask Vodafone.

Those who talk about the inaction of the Reserve Bank of India (RBI) on the rupee probably fail to realize the power of a state. Just because the RBI and the government haven’t taken stronger measures, doesn’t mean they can’t.

Remember, the government has the power to change the goalposts mid-game. And these kinds of moves won’t get any opposition from Mamata, Mulayam and Karuna, probably because they would fail to comprehend the implications.

The RBI’s moves around export repatriation, although not having a major impact on flows, have more symbolic importance. It’s the RBI’s way of warning speculators “behave or else.”  If large companies playing the speculating game do not get the message, then the RBI and the government have a whole arsenal of tools to break the backs of speculators.

The fall might continue a bit longer. However, I don’t expect it to have any significant impact on corporate profitability. The reason for this is that, at some point, the RBI and the government will crack down hard on speculators and that would be the end of the rupee’s fall.

The RBI has already issued a veiled warning to speculative interests. The next set of measures would be far harsher.