Saturday, 8 June 2013

Vicious Circle

The dwindling returns in Nifty in dollar terms is causing the waning of FII inflows.
The dwindling FII inflows is putting more pressure on the INR vis a vis the USD
causing the INR to depreciate at a vigorous pace.    This is exactly the opposite of what
the Finance Minister would have wanted to happen.    The acute current account
deficit problem is another reason for the depreciating rupee.

The depreciating rupee may give rise to cost push inflation with a lag effect.
Something which the RBI would not want to happen, as this may restrict it from the
possibility of any further rate cut.    Now, if lending rates do not come down, how will
capital expenditure pick up?

Given this scenario, how will the government come out of this vicious circle of weak
rupee, high inflation, slow growth and almost nil capex?    Hard times ahead.

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