|Sand in the wheels|
|Friday, 11 May 2012 00:00|
RBI can just delay Rupee fall, governance the real issue
With RBI coming out with yet another set of measures to try and stem the rupee’s fall, this time by telling exporters it was mandatory for them to convert half their dollar balances in Exchange Earner’s Foreign Currency (EEFC) accounts into rupees, the rupee ended at R53.375 on Thursday as compared to R53.827 on Wednesday. This is however likely to be a temporary measure, sand in the wheels as it were, since the rupee’s value is driven by more fundamental factors including India’s rising twin deficits and the government’s distinct, and increasing, anti-business stance—postponing GAAR by a year has alleviated FII fears, but the retrospective tax amendment has spooked FDI and cutting 18 months from Qualcomm’s licence (the delay of 18 months after it gave the government $1bn for the licence wasn’t the company’s fault) is the latest example of this.
A look at RBI’s interventions since mid-December when the rupee was at 53.715 should help make this clear. Between then and now, RBI has sold $16-17bn of dollars but, apart from a brief period when thanks largely to the LTRO-induced global liquidity and ‘risk-on’ behaviour of investors there was a respite (rupee was 48.695 on February 3), the rupee is back to where it was—getting exporters to convert half their EEFC dollars to rupees, by contrast, will bring in just $2.5bn or so more dollars into the system. During this period, RBI has relaxed interest rate ceilings on foreign currency bank deposits to 200 points above LIBOR, allowed banks to lend to local residents with foreign currency deposits as collateral and more. Indeed, from end-February to now, while oil prices have fallen around 9%, the rupee has fallen by a similar amount—conventional wisdom, however, is that given India’s high oil imports, a fall in crude prices will lead to an appreciation of the rupee. Similarly, while government officials argue the current account deficit overstates the problem, a recent report by Morgan Stanley argues that even if gold imports fall to a more normal level, the current account deficit would still be a high 3% of GDP.
And while it is true RBI has forex reserves of $295.4bn compared to FY12’s $187bn trade deficit, India’s financing of this is creating its own set of problems—as compared to 44% in the 2001-10 period, the share of debt-creating inflows was 65% in FY12. FII inflows were $4.2bn in December 2011, rose to $5.1bn in January and to $7.2bn in February, then there were outflows of $0.5bn in March and $0.9bn in April; till date, there have been inflows of $0.2bn in May. These may rise again with the GAAR fear going, but with India Inc’s profits slowing and the rupee falling rapidly, that’s not a certain bet. FDI flows for FY12 were higher than those for FY11 but there is a distinct softening from $5-6bn each month in May-June 2011 to around $2bn each month in January and February 2012—unofficial reports suggest it rose to $8bn in March with BP bringing in the proceeds of its purchase in RIL’s gas fields, but it’s difficult to see how this can sustain in the current environment. Only the government can save the rupee, not RBI.