Posted by: sanjayshetty | June 30, 2005

Liquidity and the dollar crisis.

The Indian finance ministry and the RBI launched the Market Stabilisation scheme in March 2004 to stem the flow of excess liquidity into the economy due to the build-up of foreign exchange reserves.

According the the Hindu Business Line :
“During the current fiscal, an aggregate amount of Rs 1,12,000 crore has been “sucked out” from the market so far under MSS, which includes Rs 25,000 crore through dated securities, Rs 21,000 crore from 364-day T-bills and Rs 66,000 crore by way of 91-day bills.”
The above quote is from an article dated 8th of March 2005.

Amazingly today the Economic times reported that the government will be releasing 13,751 crore of liquidity into the money market. Why are they doing that at a stage when amazing amount of foreign exchange is entering the stock markets in India and in various investments?

From the looks of the above it’s apparent that massive steps are being taken by the government to manage the excesses in foreign exhchange which it has been accumulating.

Based on what Robert Kiyosaki had mentioned on his Rich Dad Website and what a friend Vishal at the Richdad-Mumbai club and me were discussing a couple of days ago I decided to read the book the Dollar Crisis.
It explains how world over countries are struggling due to excessive liquidity i.e. tons of excess foreign exchange or high powered money entering their countries.

A typical reaction to high powered money entering any economy is sudden increases/bubbles in stock markets, real estates and almost everything…

Is India, a country which is considered to be managed by shrewd and closely monitoring financial experts (currently our Prime Minister Dr. Manmohan Singh and P.C. Chidambaram are considered to be top financial wizards) currently facing what is known as a Dollar Crisis?

Just yesterday, Deepak Parikh chairman of HDFC said that property prices in quite a few areas in the country are very high and un-sustainable. A similar boom is is currently underway in the United states as well.

Now one might say that Indian companies are doing good and hence the market is going up. Well yes our companies are doing well, and this in turn is earning good foreign exchange and building up our reserves. Thereby creating more liquidity. But is the stock market’s current high of 7000+ justifiable? Frankly who knows 🙂 maybe it will be at 8000 or more a couple of months later and I might think that is the tipping point?

One thing though is extremely clear, Excessive liquidity is indeed causing these bubbles.

Sanjay Shetty

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