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Opinion Editorial

Published: July 17, 2013 01:40 IST | Updated: July 17, 2013 16:13 IST

Perpetuating short-termism

The measures announced by the Reserve Bank of India on Monday evening, aimed at restricting credit to banks andcurbing speculation in the foreign currency markets, reflect the central banks growing helplessness in the face of therupees free fall against the dollar. Since the beginning of June, the rupee has lost 5.51 per cent. On July 8, it touched anall-time low of 61.21/$. More conventional RBI intervention selling dollars, usually through public sector banks has had temporary results, with the rupee stabilising for a short while only to resume its downward path. Besides, theextent of central bank intervention is constrained by the availability of dollars in its hands. Drawing down forexreserves to bolster the rupee is never a healthy option and obviously cannot be continued indefinitely. That explainswhy the RBI chose on Monday to target liquidity in the banking system rather than the exchange rates directly. Themeasures announced include a Rs.12,000 crore open market sale of bonds, fixing a lower borrowing limit for banks andraising the interest rate on the marginal standing facility (MSF). The last is an emergency funding option available tobanks from the RBI, with its interest rate aligned to the repo rate. The new rate, 10.25 per cent, is 3 percentage pointsabove the repo rate; and, despite denials from the Finance Minister, might well portend a tighter than anticipatedmonetary policy statement two weeks from now.

Concerns over the rupees sharp decline have dominated recent macroeconomic policy discourse in other ways too. Thefinancial markets sharp reaction to the reported tapering off of the ultrasoft monetary policies of the U.S. FederalReserve might be an overreaction but it has clearly exposed the external economys vulnerabilities, especially in thecontext of the large current account deficit. Exports are still to pick up and the recent fall in gold imports will be offsetby the higher petroleum import bill. Unfortunately, India does not seem to be pursuing any option other thancontinuing to woo portfolio flows and encouraging corporate houses to continue borrowing from abroad, at least in theshort term. The rupees fall has shown the pitfalls of these two policies. In June, there has been a big sell-off in Indiasequity and debt markets and this has been in tandem with the fall in the rupee. Indian companies which wereencouraged to borrow abroad are now saddled with substantially higher repayment obligations. Of the medium-termstrategies discussed, the flotation of a quasi-sovereign bond issue to tap non-resident Indians needs to be pursued withcircumspection. There are a number of hidden costs, as past bond issues show, besides regulatory hurdles.

Keywords: foreign currency markets, CAD, rupee depreciation, CRR, repo rate, RBI monetary policy review, retailinflation

Printable version | Jul 17, 2013 4:57:16 PM | http://www.thehindu.com/opinion/editorial/perpetuating-shorttermism/article4921423.ece

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