FIIs walking out has hit the rupee more than speculators have
Given how each measure the government is taking to bring down volatility of the rupee doesn’t seem to have too much of a life-span—within a week of RBI’s actions, the rupee is almost back to where it was at 59.9 to the dollar last week Monday—there seems to be a palpable sense of unease. And while one wing of the government says that everything including sovereign bonds is on the table, another rules out such bonds; one arm is in favour of further tightening of trading in currency derivatives while another isn’t; also on the cards are further increases in import duties, much like those on gold, on electronic goods like iPhones. Why the government is not moving on ending Coal India’s chokehold on mining so as to lower coal imports which add up to around 1% of GDP is a different matter, but the point worth keeping in mind is that such measures are missing the point. Hiking import duties encourages smuggling and the fact that banning commodity futures is a tried-and-failed government policy—this has rarely brought down commodity prices—doesn’t seem to dissuade those who want more restrictions on currency derivatives. Just 10 days ago, Sebi raised margins to 100%, meaning that every deal had to be backed by the full amount; it also lowered position limits sharply for both brokers and clients, and banks were prevented from taking proprietary positions in the forex market. None of this, however, prevented the rupee from falling, from 59.52 to a dollar on July 1 to 60.62 on July 8, recovering to 59.32 the day after RBI savagely reduced liquidity and the falling once again to 59.72 yesterday.
Apart from the fact that the rupee should have stabilised if the cause was rank speculation, the collapse of the rupee can clearly be seen on days when FIIs pulled out of the market in a big way. On the 12th, FIIs pulled out $853 million out of the equity market and the rupee fell from 59.6 to a dollar to 59.9. All told, with FIIs pulling out $2.9 billion between July 1 and July 19, it’s difficult to see how the rupee could possibly have fared differently.
All that the RBI-Sebi measures have done so far is to lower the vibrancy in the forex market. Average daily volumes traded have come down from over R25,000 crore on NSE on July 10 to less than around R10,000 crore by July 19. The cumulative number of contracts with open interest came down from 47.7 lakh to 15.8 lakh. Therefore, what are usually measures to control risk have been used to curtail trade—naturally, price control hasn’t happened. Ironically, this has made it difficult for hedgers to cover themselves, something RBI has been asking them to do continuously. In fact banks have to make higher adjustments in capital requirements for loans given to companies which have unhedged positions in the forex market. It’s also a good thing to keep in mind that were RBI-Sebi to choke trading in currencies on exchanges, more of the market will shift to NDF markets overseas or to opaque OTC markets locally—put together, the volumes in the last two markets are around $50 billion a day compared to around $4 billion on local stock exchanges. Why shoot the messenger?