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Thursday, 22 December 2011 00:00
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Swap lines and SBI issuing overseas bonds will help Rupee


Various moves by RBI to come down on speculation on the rupee have helped stabilise the currency somewhat, but if you believe a large part of the rupee’s fall has to do with there not being enough compensatory capital account flows to match the rising current account deficit, this would suggest the rupee has some way to fall since the current account deficit isn’t going to get any better in the short term—very broadly, developing countries with current account surpluses have seen their currencies depreciate the least while those with deficits, like India, have seen sharp depreciation. Which is why, over a 90-day period, Standard Chartered’s research team says it expects the rupee to fall to 54—the rupee coming back after that depends on the outlook for reforms as also to what happens in the global economy.

While anything RBI does has to be seen as only a short-term measure until the government is able to convince investors it plans to push policy reforms—the fact that two critical legislations have been put on hold while the food Bill has been pushed suggests investors will take some convincing—RBI does have many more options other than those which it has already exercised including raising interest rates on NRI deposits. Two other suggestions that are worth examining is whether SBI should be encouraged to go and mop up funds as it did so successfully through the Resurgent India Bonds (RIB) when things looked quite shaky after the nuclear tests—given the global liquidity, mopping up $10-15bn may be possible, and RBI could agree to take care of the exchange risk. Establishing swap lines with countries India runs trade deficits with, China for instance, will also help lower demand for dollars—in the long run, however, this works only if moves are made to help facilitate Chinese investment in India. China, it should be appreciated, has such arrangements with eight countries already, all of whom were keen to reduce their demand for dollars. Increasingly, India’s diplomacy needs to focus on this aspect of things.



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