Says Shekhar Sathye of Kotak Mahindra Finance: "The Government was happy at the slide because it was achieving rupee devaluation, which was its purpose, without actually devaluing it. It was done smartly."
Says Shekhar Sathye of Kotak Mahindra Finance: "The Government was happy at the slide because it was achieving rupee devaluation, which was its purpose, without actually devaluing it. It was done smartly."
Some circumstantial evidence: for a period of 28 months beginning early 1993, the Government kept the rupee rock-steady at Rs 31.37 to a dollar. Indeed, with millions of dollars of foreign investment flowing into the country – that is, more dollars chasing rupees than rupees chasing the greenback – the real value of the rupee for the whole of 1994 may actually have been higher than where the Government pegged it.
But, with an aim to keep the rupee weak and thus help exports – a cheaper rupee meant cheaper India goods in the world market and so higher sales – the RBI kept buying the dollar at Rs 31.37. The Government’s current stand – that it was market forces and market force alone that pulled the rupee down – is only technically true.
Market forces did pull down the rupee. But in the currency trade, the Government is the market forces, with the State Bank of India (SBI) alone accounting for 80 per cent of the volume. What pulled the rupee down was almost definitely the SBI buying stacks of dollars so that the Government could service its foreign debts, and maybe Indian Oil, another government-controlled body corporate (see interview). While this was happening, the RBI and the Government, simply looked the other way.
Shorn of the jargon, the world currency market is a pretty simple place. If currency traders are buying a lot of dollars using rupees, the dollar rise against the rupee, that is, it becomes more expensive. If the flow of the transactions is the other way, the rupee becomes more expensive for the dollar to buy.
This is in a free market, which the Indian currency market most definitely is not. The SBI is referred to respectfully as "Big Daddy" in the market, because all of India’s petroleum purchases and much of India’s foreign debt servicing is routed through it. If the Government wanted the rupee to stay steady, it could have engineered it. Indeed, the RBI, which is maintaining a sphinx-like silence about the whole episode, is rumoured to have sold only around $200 million till now to keep the currency sliding at the right pace.