The unavoidable conclusion is that since the value of a currency is irrationally associated with national pride by the man on the street, the Government has decided to jettison industry's interests in a typical pre-election symbolic act.
The RBI's desperate measures to shore up the rupee draw flak
The unavoidable conclusion is that since the value of a currency is irrationally associated with national pride by the man on the street, the Government has decided to jettison industry's interests in a typical pre-election symbolic act.
The check-points to halt the decline of the rupee against the greenback: post-shipment credit in foreign currency scrapped; interest rate on rupee post-shipment credit for over 90 days freed; interest rate surcharge on import finance raised from 15 to 25 per cent (imports for packing credit exempted); exporters warned of action under the Foreign Exchange Regulation Act for delayed repatriation of export proceeds; and cancellation and re-booking of forward contracts brought under scrutiny. While the RBI can justify its moves, they are a step backward, coming as they do after having allowed the market to be a currency exchange-rate arbitrator and permitting the real value of the rupee to emerge and strengthen.
Says former RBI governor S. Venkitaramanan: "The RBI measures are good, barring the termination of the post-shipment dollar-denominated credit, which was supposed to be given to the Indian exporter at the same rate as his competitors abroad. This measure could be counter-productive."
The central bank squarely blames speculators for the present slump in the market. But economy watchers think otherwise. Since 1949, most of the debt servicing and defence-related expenditure has been drawn from the central forex reserve. But last year, the Government decided to raise the entire non-IMF related debt servicing and defence expenditure—to the tune of $7 billion—from the market, pushing all sorts of panic buttons in the process. Had the Government phased out its buying, the turbulence in the market may not have surfaced. Says Venkitaramanan: "I don't mind the rupee depreciating. But there must be some certainty in the value of the rupeeso that industry can plan better." Besides, he says, the biggest speculators are the Government's own banks who lend money to importers to speculate.
With the reserves at $16.76 billion, which is sufficient for about five to six months of import requirements, why should the Government react the way it did in 1991, when reserves dropped to a three-weeks requirement? Monitoring of the cancellation of forward contracts for more than $100,000 virtually translates into banning this facility. This is anti-reform, and contraction of the banking hours anti-commerce. While for business firms, trading closes at 2.30 pm, the inter-bank trade goes on until 4 pm. The RBI has contracted the hours, but currency trade is a 24-hour business. Says G. Natarajan, general manager, Aruna Sugars Finance Limited: "There should be some provision for trading beyond the banking hours. Or there shouldbe no inter-bank trading beyond 2.30 pm, which is a restrictive move."
Ahluwalia dismisses industry's fears by saying, "The industry in an economy going through a transition—from a closed one to one that's open—has to learn to live with the variability in the currency." But according to Venkitaramanan: "The forex reserves should be used to stop the depreciation of the rupee. Reserves are a buffer to be utilised when we are under attack, so that we can defend ourselves from the fall of the rupee. And we are under attack now." However, the RBI wants to dump as few dollars as possible in the market because it will drive up interest rates. To reduce interest rates it will have to monetise a greater portion of the deficit, which will increase infla-tion. But if it doesn't resort to monetisation, it will restrict growth. So it's inflation vs growth forthe Government, and most economists feel that it would be better for the Government to go for growth.
There is no universally accepted formula for determining the exchange rate. The strength of a currency is not determined by its exchange rate but by the demand it creates for itself. After the rhetoric on full convertibility, the regression into a 1991-ish situation highlights the ad-hocism that governs the macro-economic management of the nation. Why has the Government failed to sustain the forex reserves that touched an all-time high of $20 billion? And if, as it claims, the 'fundamentals' of the economy are strong, how can a handful of speculators derail it? Is it the rupee which is inconsistent or our macro-economic managers?