What would happen if the Indian government tomorrow decided to shut down all their mints. Never to print rupees again?
Let’s say if you summed up all the money in the country today – Add all the money in all the bank accounts, all the money in all the wallets, under mattresses and in safes you would get a finite number, say INR 10 billion trillion. Big enough for ya? As a policy the govt. decides that it is not going to print rupees again. Let’s say the $-Rs rate today is INR 50 to the dollar. No other policies would change. No current account convertibility. No changes to subsidies, etc. How would things transpire?
I’m thinking the following would be the effects:
- The conversion rate for Rupees would fall/rise to the real value. I would think the Rupee would always be slightly overvalued in a growing economy since future value of those rupees would fetch a better rate.
- As the country has 6-8% growth every year the value of the rupee would rise by a similar amount since the same number of rupees accounts for 6-8% more goods and services.
- Inflation would fall (But would it be a real fall). Deflation would ensue since there’s too few rupees to go around for increasing value in the economy. This deflation however would be a given and hence expected as long as the country has growth. On the other hand if the country went into recession, inflation would be a given.
Here are what I’m unclear about:
- What would happen in case of a balance of payments deficit? Customers would buy more Rupees from the bank than other customers who sold Rupees to them or vice versa. Where would they generate the deficit from? Would this be a scenario to actually print rupees since it is real value coming in or leaving the country? Example, The INR-Dollar rate is Rs. 50/$. TCS did a project and got paid $100,000 from a US client for it and they converted it at the bank for INR 50L. At the same time Reliance paid salaries of $150,000 to their foreign staff and hence bought so many dollars for 75L. We now have balance of payments deficit of 25L. The bank would be stuck with 25L extra rupees and would need 50K dollars from somewhere. What would happen in such a case compounded over millions of deals happening?
I am not even close to being an economist, so I’m looking for feedback on this scenario. Why is it good, why is it bad?