The RBI has made heroic efforts to stabilise the rupee, which has been extremely volatile in July and has depreciated 13 per cent since April 30. The measures announced on Monday night after hectic meetings between the RBI governor, the finance minister and the Prime Minister are aimed at mopping up the liquidity in the market.
This could provide the rupee some short-term respite. It also sends out a message that the RBI and the government are serious about not letting the rupee fall further. The main objective of the government, and particularly Union finance minister P. Chidambaram, seems to be to get foreign institutional investors back into the market. They had been pulling out funds rapidly from the debt market and have so far pulled out $2.6 billion. In two weeks in July alone they withdrew $1.41 billion and, because of this, the rupee touched its weakest level — 61.21 to the dollar in intra-day trade on July 8. Because of the weakening rupee, FIIs find it more profitable to invest in the US where the markets have been positive with signs of the US economy turning around, even though bond yields are higher in India. The government would like to bring them back as it depends on the inflow of dollars by FIIs and foreign direct investment to cover its burgeoning current account deficit. On the FDI front, efforts are afoot to raise FDI limits in sectors like aviation, defence, telecom and insurance.
The reasons for the rise and fall of the rupee are a very complex, but suffice to say that one of the primary reasons for the current fall in the rupee is the lack of confidence in the country’s policy framework. There are innumerable challenging issues that remain to be tackled, like the current account deficit which is ever widening, high interest rates, high fiscal deficit, fall in exports and rise in imports. There is a view that much more will have to be done to support the rupee by increasing foreign exchange inflows. One of the suggestions given to the government is the issuance of forex-denominated offshore bonds in the near term that could bring in huge inflows, estimated at up to $20 billion. The finance ministry is reportedly looking into the various suggestions and it is hoped they will take a quick decision in the best interest of the rupee. The effect of the measures taken by the RBI on Monday cannot last too long.
Meanwhile, for the people, the tightening money policy of the RBI means that those who expected housing, auto or personal loans to get cheaper will have to kiss their hopes good-bye, at least in the short and medium terms.