INSUBCONTINENT EXCLUSIVE:
Currency traders who are bearish on the rupee could immediately sense that the grand plan unveiled last week would neither create an instant
supply of dollars nor dramatically lower the demand for the greenback
Besides, some of the measures proposed on Friday were contrary to what the central bank has been repeatedly advising banks and
companies.
Should a government tell corporates to borrow dollar loans and keep them unhedged to increase dollar inflow Or, borrow oneyear
forex loan to meet working capital needs After all, why should businesses risk their balance-sheets to improve dollar supply and protect the
rupee Even if it sounds tempting to a businessman, would it be wise Similarly, higher import duty on gold inevitably sparks higher smuggling
simple, unambiguous, and almost certain
from the Indian diaspora.
But the scheme seems to have met with opposition as it brings back memories of 2013 and could probably hint that
the government now is as desperate as the government then
There are other issues: a handful of foreign banks will make money; many rich NRIs will borrow cheap from overseas banks and park here to
earn a neat spread as they are protected from currency fluctuation risk; and what if the rupee nosedives later and the government is forced
to pay the huge difference
However, the last programme to attract NRI money was not at a stiff cost to the exchequer
More importantly, none of these would matter if an assured dollar supply against higher returns stabilises the rupee.
It could come across
imports); and, this deficit is financed with capital inflow of dollar into stock, bond and loan markets
half-a-billion dollar every day to fund the currency account deficit
While FDI has grown, so has overseas investments by India Inc.
What is RBI thinking No one is sure
communicate with banks as they used to in the past
Their silence has led the market to believe that the central bank thinks the rupee is overvalued and would not mind letting it weaken a
However, its intervention to support the rupee has been close to $20billion (which is more than what is generally felt)
measures, so effective in advanced markets, rarely play out meaningfully in an economy like India
Hiking interest rates could backfire in an environment where inflation is modest, small businesses are struggling, and bad loans are a
Even if RBI keeps rates unchanged, foreign investors may sell equities on valuation grounds; but chances are they return to buy bonds (which
has suffered major sell-off) once the rupee stabilises
Betting on a rate hike in October to stop the fall in currency could be too long a wait
(It could even reinforce the conspiracy theory that the powers that be always let the rupee decline in the run-up to the polls)
A weaker currency stokes inflation
But letting the rupee slide, fanning inflationary forces, and then raising policy rates a month later could be a messy solution to a
