Though there might be the large-scale capital inflow (dollars) into the Indian equity market, it would seem to us that the party should be over shortly. Even as the Indian economy gets integrated into the world economy, there is still mis-governance and inefficiencies at the administrative level, resulting in most Indians having one of the lowest standards of living.

Going by Fisher’s hypothesis ( http://en.wikipedia.org/wiki/Fisher_hypothesis), the rupee should decline by an average of 2-4 per cent each year to maintain the equilibrium between the two currencies.

Also, the low labour productivity ( only 9 per cent of that of the US) should have a negative impact on the rupee. But as we can see, the rupee is behaving exactly in the opposite way. What are your thoughts on this?

Tushar Parekh

You are absolutely right. India’s governance levels are appalling, but a lot of foreign investors think that it is not as bad as to stall the economy. Whether that is true or not only time will tell.

That said, my opinion is that if governance does not improve, the economy will slowly but surely deteriorate. For more on this read Governance Matters, a recent report of the World Bank.

As for the second part of your question, times have changed since Fisher wrote his hypothesis. The unprecedented levels of capital have turned many a theory on its head. A time may come when the liquidity will dry up, but as things stand, it doesn’t seem likely to happen anytime soon.

SUNIL RONGALA

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