Is it GDP? or less poor people? or growth rate? Or purchasing power?
I argue or rather show that the objective measurement of any “development” in the country is measured by its currency value.
Importantly let us observe the role played by the Reserve Bank of India (similar to the Federal Reserve in the US) which is empowered to “regulate”, “supply” and “control” the money supply, amongst other things, otherwise which the country would go into “tatters” and private banks would make your life miserable, isn’t it!!?
Well, if I ask any person in India or otherwise if the country was “developed” before or after it attained its Independence then the answer sure would be after Independence.
Is it? Let us see.
Before India attained its Independence, the value of rupee was much higher earlier than what it is today. Yet no one seems to question or understand as to why the value of Indian rupee stands so low today despite of all its globalization, liberalization and privatization policies.
For understanding this better, I am inclined to discuss some basic economics which might be helpful in understanding the role played by RBI—and then you can decide if it is really to achieve the “noble” purpose of regulating or controlling or is it achieving the exact opposite of what was “intended”.
For instance, let us say that the total amount of money in circulation is Rs. 100. Of course, everyone knows that the value of those hundred rupees is not generated just by printing the currency but that something (usually gold) is kept as a reserve for the value so created or produced on the amount printed.
Now, let us imagine that you could buy 100 shirts or whatever commodity out of that 100 Rupees value. The economy is growing and people buy and exchange a lot of things for the money they have i.e. production increases and the value of the rupee ultimately increases.
Now, let us suppose that after trading those 100 shirts, you have incurred some profit out of the amount i.e. say, you have made the “value” of Rs. 100 almost equivalent to Rs.150.
But in this instance what the RBI does, in “public interest”, is that it supplies the remaining Rs.50 so generated by printing more money. So, you have Rs.50 more in circulation and value of the rupee actually remains the same but rather “purchasing power” of the people increases.
So, you do have Rs.50 more in your hand but don’t forget that the value of it is the same as what you used to have or rather worse since prices accordingly rise. That means, the same 100 shirts that you would have otherwise bought for Rs.100 is now bought for Rs.125 or 130, considering you have some savings.
I am just limiting the commodity to one aspect i.e. shirts but the overall principle remains the same.
So, the value of the rupee should have actually gone up due to the production generated and created due to such transactions. But it will not happen because of the extra amount printed for which the value of the rupee remains the same, or decreases. So, what should be done about this? If the amount in circulation is kept constant, amongst other things, then the value of the rupee would truly reflect the growth of the economy. But we see daily that the prices only increase and value of the rupee going down simultaneously, despite all their policies and what not.
Now, I really do not know what “ought” to be done in this instance except that Banks generally issue currency based on some value it has attained prior to issuing such currency. But the RBI, in fact, makes things worse for us. Apart from this, RBI also sets the lending rates of the banks, prescribes “saving interests” for all banks and some major blunders which they don’t realize nor care to realize.
Let private banks function on their terms and see the amount of growth that takes place in an economy. For analogy of the role played by the Central Banks, observe the role by the Federal Bank of USA which had set mandatory low interest rates on housing loans etc. for all private banks and the effect is what see today i.e. recession. So, if the economy has to be saved, then RBI or Federal Bank are not the solution, they are the problem!
I would like to thank Ramana who had shared some great inputs on this topic without which this post would not have been possible.