The Way Out of the Current Macroeconomic Mess: A Note
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The current situation of a large CAD, low growth, and plunging rupee is a result the combination of early withdrawal from the fiscal stimulus and the RBI’s monetary conservatism. There is possibly a way out if credit can be expanded to close the differential between the low end government bond yields and the repo, accompanied by a large push on investments with an appropriately structured investment tax credit valid for the next twenty four months. It could crowd in investments to attract FDI and portfolio investments and if the RBI does not allow the current rupee to appreciate in real terms then the CAD could close, with reasonable growth as well. Without these actions the holding out operations on the currency by the RBI can at best delay the further fall in the rupee, and growth which would have a await a protracted recovery from the expected rise in exports some six months from now.
- Working Papers