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Getting The Rupee Back From The Brink

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The likelihood of India raising the cap on foreign investment in sovereign debt by $5 billion soon, a move that may support the sliding rupee and help fund a high current account deficit, saw the Indian currency snapping its five-day losing run. The rupee on Tuesday, 4 June '2013 rebounded from 11-month lows to close with a hefty 32-paise gain at 56.44 against US dollar on heavy selling of the American currency by exporters amid signs of FII inflows.

A casualty of shifts in global currency trends, the rupee had neared the record low of 57.32 per dollar that it hit in June 2012. 

"Today, weakness in dollar index and strong gains in Euro also contributed to the gains in rupee. Rupee was supported by reports that India is likely to raise the cap on foreign institutional investment in government debt by $5 billion soon", said Abhishek Goenka, Founder & CEO, India Forex Advisors. The dollar index was just up by 0.03 per cent against a basket of six major global rivals.

Chief Economic Adviser Raghuram Rajan told reporters in New Delhi that there is "lot of unused space" for FII investment in government securities (G-Secs).
 
Read Also: India Likely To Raise FIIs Investment Cap In Gilts

Read Also: India In Tight Spot As Rupee Nears All-time Low

A weak rupee will push up India's import bill, which could fuel inflation and worsen a current account deficit that was equivalent to a record 6.7 per cent of gross domestic product in December.

"The file has been sent to the finance minister for signing, and once it comes back,  the decision could be announced any time," one of the two finance ministry officials told news agency Reuters. The officials declined to be named as they were not authorised to speak to media.

The government is worried that the strengthening dollar and investor risk aversion could lead to capital outflows, making it tougher to fund the current account deficit. Finance Minister P. Chidambaram reckons that funding the deficit will require at least $75 billion in foreign inflows.

How To Protect The Rupee
While the government is already considering raising foreign investment limit on debt to protect the rupee, some Other steps the government could consider are:
 
Asking Exporters To Buy Rupees: This could be a likely step. The central bank could ask exporters to convert part of or their entire overseas foreign currency earnings in the market immediately, providing near-term relief to the rupee.

Raise Funds Abroad: The RBI could also persuade banks and financial institutions to raise funds in dollars abroad and lend them locally, a measure that has worked in the past when overseas rates were attractive.

Stagger Import Payments: RBI could issue rules delaying or staggering import payments, which are typically made at the end of every month, although the RBI has not taken this step in recent years.
 
Some less likely measures include opening a dollar-window for oil companies to buy dollars directly from the central bank instead of from markets, but it would drain foreign exchange reserves.

The RBI could hold auctions to buy bonds from oil companies, providing them dollars or other non-rupee currencies, but the outstanding amount of oil bonds is small as the government has been giving direct cash subsidy to oil companies in recent years and has stopped issuing bonds.

The government could review limits for foreign investment in sectors such as defence, or revive pension and insurance reforms, but passage through parliament could be tough.

Sovereign-backed non-resident Indian bond through State Bank of India to NRIs. But such a move could increase the country's debt and interest liability.

Also a possible step that could be unlikely includes sovereign overseas bonds. The government could issue sovereign bonds to raise dollars from overseas investors, but the RBI is reluctant to expose the country to foreign exchange risks during repayment.

Swept By Global Tides
Global market tides have swept rupee close to an all-time low, raising current account financing and inflation risks, but for now policymakers are more likely to use small-scale intervention and administrative measures to defend the currency.

The rupee fell 4.8 per cent last month, and was the worst performing Asian currency as the dollar rallied broadly on speculation that the Federal Reserve will begin reducing its monetary stimulus later this year.

The local currency had lost 119 paise in the past five sessions on rising worries over current account gap and fears that withdrawal of US stimulus will hit inflows from overseas.

Having a currency at an all-time low is not a great advertisement for the government's management of the economy ahead of important state elections due in coming months and a national election due within a year.

(Agencies)