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Tuesday, 26 June 2012 00:01
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RBI moves to help a bit, waiting for big policy move

Between Prime Minister Manmohan Singh promising to announce several reforms while coming back from the G20 meet, and outgoing finance minister Pranab Mukherjee telling newsmen over the weekend that the government would come come out with measures to improve market conditions, those expecting a series of big bang measures on Monday were sorely disappointed. While the market gained 151 points from Friday’s close and the rupee 75 paise, the market crashed 249 points after the measures were announced, and the rupee fell 63 paise. In themselves, the measures were welcome, but they could have been announced by RBI as routine housekeeping measures; they didn’t need the fanfare of the finance ministry’s announcements. A $5 billion hike in the limit for FIIs buying into government paper will help inflows, more so since the minimum tenure of the paper FIIs can purchase has been reduced from 5 years to 3 years. Corporates who’re under pressure for funds, similarly, will welcome the hike in ECB limits by $10 billion and the reduction in withholding taxes was a budget promise that needed to be activated.

But, and here’s the problem, today’s moves won’t help unless they’re followed up with government action in other areas—that’s why, within hours of the announcements, the rupee fell 63 paise to end at 57 to the dollar versus Friday’s close of 57.12. In FY12, though the final numbers aren’t out, estimates are capital account flows fell $8 billion or so short of what was needed to finance the current account deficit. Given the sharp fall in oil prices, and a reduction in gold imports, expectations are FY13’s current account deficit could be anywhere between $65 and $70 billion, or $5-10 billion less than FY12’s. Even if you assume Monday’s moves by RBI result in $15 billion more, how is the rest of the deficit to be financed? Even if you assume net FDI flows remain at around FY12’s $20 billion (a big assumption given the investor mood), that’s $30-35 billion which needs financing. If FII flows rise, that’ll help, and the likely higher NRI deposits, similarly, will be a big help. But, going by the way capital flows take place, while a global ‘risk off’ behaviour lowers prices of crude oil which helps lower the current account deficit, it also lowers the flows of risk capital to emerging markets like India—in other words, FII and banking capital flows could get hit. And if, as looks likely, the Europe crisis deteriorates further, the rupee will depreciate even further—combined with lower returns from India Inc in even rupee terms, it may be prudent to factor in very low FII inflows in FY13. In short, we need to see the reforms the Prime Minister was talking about to newspersons over the weekend.


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