If countries feeling the effects of inflation think they are going to be able to use exchange rate currency as a tool to fight it off, they are wrong. According to Reserve Bank governor Y.V. Reddy, “If the exchange rate is to be market-determined, you cannot use it as an instrument for some policy or the other.” His comments were made at a seminar in Singapore where he was responding to a question regarding the currency use.
Reddy believes that the inflation rates being reported may actually be higher due to the way they are being read because of underlying inflation pressures. He believes that oil subsidies may be depressing the actual figures. “The current high level of inflation is totally unacceptable, especially in terms of impact on inflationary expectations,” he said. Currently the benchmark ten year bond is yielding two basis points higher as traders watch measures to tighten to help calm price pressures, a good side effect overall.
Banks are losing ground in their foreign currency deposits due to the economic conditions affecting the world. Part of the reason is that they have had to withdraw their dollars from their overseas accounts in order to meet the demands of the customers’ at home. The shortage of dollars has been causing an uproar, forcing the banks to deplete their deposits to meet the needs and demands of importers among other entities. The dollar is in demand due to the high trade deficit and falling investment flows.
Usually the investment flows fill in this deficit gap, but with the small amount of capital that has been coming in, the banks had no choice. Countries like Pakistan have their money in banks in London and New York and their foreign government investments are in short-term papers. Other banks have their money in different overseas banks. Once the economy gets back on track, the banks will be able to replenish their funds.