Let us try some Derrida on Ajay Shah.
What is the problem according to him?
– The RBI is keeping the rupee artificially low by buying dollars. This helps in importing inflation.
– The interest rate differential is high. US 90 day rate is 1.28% and Indian 90 day rate is 7%.
– This difference, and the fact that RBI keeps the rupee low helps Indian corporates do covered interest arbitrage.
What is the solution he proposes?
– The RBI should let the $/Rupee free and find its level, say 36. There will be a one-time relief on prices.
– The RBI should cut interest rates by 3%, to reduce the interest differential, to reduce this flow of money. (His words, not mine).
Why is he a moron?
When the RBI lets the rupee free at the spot and forward level, the forward rates will adjust so that there is no covered interest arbitrage. The $20bn flow will vanish. Inflation will also be taken care of, to some extent.
There is no need to cut interest rates at all.
If this was a solution, every central bank in the world should target the interest differential with the US, not its own growth, employment and inflation. The ECB will rush to cut rates each time the Fed cut rates.
The man shows no understanding of basic economics, yet tries to advise the RBI.