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Who Crossed the LoC?

Economic Implications of aggression across Line of Control

Wednesday October 05, 2016,

2 min Read

I was at +7 GMT when I first read about India’s aggression across Line of Control. First reaction, my mind was filled with pride. Ah! At last we have responded! In seconds my pride converted to plight- do I have to undergo a Tom Hanks act as in ‘The Terminal’? With visit to couple of websites, I could safely drop my apprehension. However what I understand is by end of day, economic implications to the country were not small.

INR got devalued by a significant 0.8% in one day. Apart from sentiments, nothing has changed between yesterday and today. To me, a communication from current RBI Governor would have saved mayhem in currency market. We miss your communicative leadership, Mr. Rajan!

Many may think it is premature to get skeptic about the silence. May be yes! Having said that I would rather be preventive than reactive. One or two more escalations from either side, India’s rating will get affected. Indian corporates will then have to turn to domestic banks to meet international obligations. Banks will be at stress. Corporates will pull back their investments from domestic Mutual Funds and NBFCs. Mutual Funds and NBFCs will have to turn to banks for liquidity thus leading to further stress among banks. Apart from relaxation of CRR and SLR, one of the common ‘balancing’ measures RBI takes to infuse liquidity is to buy USD and sell INR. Guess what, this will have further impact on currency market. Vicious cycle continues.

One of the important functions of RBI is to instill enough confidence in markets - be it currency, credit, bond or equities. At times like these, more than action, on-time communication from RBI will surely help the cause.

I appreciate and unconditionally support Mr. Modi and Indian Army’s efforts. Crossing LoC was a major one. However, as Indian citizens, we must take full cognizance of financial implications. We are a nation growing at 7+% for last couple of decades. All developing and now developed nations talk about our exemplary growth story. Question is, should we go behind self-destructive maniacs and ruin our dream run? Will this act help the poorest of poor lead a better life? Is economic growth and war mutually exclusive?