Dollar-Rupee : Prepare for a surprise

Indian rupee is a managed currency. If RBI gets nervous, it can sell or buy billions of dollars on a monthly basis and try to intervene and stop the rise or fall of the US Dollar versus the Indian Rupee. I have had a tough time understanding why the dollar rose so much against the rupee, when the dangers to US economy and increasing US national debt both seem to predict a catastrophic fall in US dollar. The catastrophic fall in all probability will happen, but it may take a while. One reason why the US dollar touched 50 Indian rupees maybe because of FII's and other banks and institutions pulling out money from India to meet their financial obligations at home. Whatever reason they pulled out the money for. But this is a temporary and not so fundamentally sound reason for the US dollar to rise so much against the rupee. That is why, unless I am unable to see some major catastrophic event in Indian economy, the dollar will fall, and will fall hard.

What effect will Obama have on dollar/rupee?

Obama's financial policies have been inclined towards more spending, stimulus package and a little bit of less focus on controlling debt (and rightly so ! - read Krugman on this). So naturally, the more spending focus is going to tend to increase national debt even more, (which by the way, now stands almost equal to US GDP). So the Obama effect is going to exert a downward pressure on the US dollar against all major global currencies, EURO, YEN, etc.

Nov 8, 2008

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