Come in RBI, govt must jumpstart reforms, not panic
When P Chidambaram returned to the finance ministry last August, one of the questions he posed to his political colleagues was: what is your strategy if the rupee touches 60? This is what convinced the reluctant party to back the planned burst of reforms. To take the most pressing case of petroleum under-recoveries, a one rupee fall in the value of the dollar—it has fallen by 9% since January—raises under-recoveries by R9,000 crore in a full year. A one dollar hike in crude oil prices—it has risen nearly 6% since May1—in turn leads to an annual hike of $1.5 billion in under-recoveries. In such a situation, Chidambaram’s question was, if under-recoveries keep piling up and the government can’t fund the oil companies, what happens when they run out of cash? Fortunately, that didn’t happen, crude prices softened, a fifth of diesel supplies got connected to market prices in January, and a 45 paise monthly hike took a lot of pressure off. It helped that the government cleared FDI in retail—both single- and multi-brand—and also got going on trying to clear stuck projects through the Cabinet Committee on Investments. Though the budget disappointed by not rolling back Pranab Mukherjee’s retrospective amendments, the tight deficit control went down well with investors, as did the promise to bring in more supplies of coal in the Budget; coal-price pooling was mooted as something the government was pushing; a restructuring of troubled SEBs was also pushed. All of this paid off and FII inflows which fell off in March, started rising again—from $1.9 billion in March, FII equity inflows crossed $4 billion in May.
RBI intervention in the spot part of the futures market also helped—in the middle of 2012, along with the government looking more proactive, RBI intervention rose quite significantly—from selling $1.6 billion in the forwards market in January 2012 to $15 billion by July; it remained at between $13-15 billion per month till April 2013, when it fell to $10 billion (data is available only with a two-month lag). With the US recovery gaining legs, and Fed chairman Ben Bernanke signalling a winding down of easy money through bond purchases, the rupee is going to be under more pressure. Apart from $60-65 billion of trade credit that will likely get refinanced at higher rates given US yields rising, at $20.1 billion, the ECB repayments in FY14 are less than those in FY13, but still a significant sum, especially when FIIs are heading to the exit door. In such a situation, the last thing the government needs to do is to panic since, at one level, a lot of the weakening is across currencies, not just the rupee. That said, it is critical that stalled reforms get a kickstart. With crude prices rising a bit, the government has to push harder on lowering subsidies and pushing in more funds through DBT—oil under-recoveries rose from R252 crore per day in May to R276 crore on June 3. While easing rules for Sovereign Wealth Funds is on the anvil, it is amazing that the bureaucracy should be allowed to play games with FDI in retail, a policy that the government expended a lot of political capital in getting cleared but which hasn’t yielded even a single proposal. Several clearances given to oil blocks remain on paper, the coal-price pooling policy has gone nowhere… The finance minister needs to have that rupee-at-60 chat all over again.