Economists welcome the RBI measures as short-term relief for the rupee. But building forex reserves is the key to reviving investor confidence, they say.
Indranil Sen Gupta, India Economist, Bank of America Merrill Lynch, said more active steps were needed from the RBI to rebuild reserves that it failed to build earlier between the second half of 2009 and the first half of 2011.
In a research report, he suggests coming out with NRI bonds or sovereign bonds or reviving FCNR (A) deposits to build forex reserves. He points out that import cover has halved to seven months, the level last seen in 1998. He estimates that about $20 billion can be raised through NRI bonds and about $5 billion through sovereign bonds.
Addressing the question as to how much dollar-selling RBI can undertake to prop up the rupee, he estimates that RBI can sell up to 25 billion dollars but points out that every dollar sold would breed further doubt.
Given the volatility in the market, is there a possibility of a run on the rupee? Sen Gupta says that forex reserves at 1.8 times short-term debt of one year residual maturity. This is still higher than the one-year minimum prescribed by the Greenspan-Guidotti rule.
Asian currency crisis
According to a Standard Chartered research report released yesterday, concerns on whether there will be a repeat of the 1998-99 Asian currency crisis are a bit over done. The economists say categorically that they disagree with the implication that these economies are on the verge of collapse and that there would be a recession.
The report drew attention to the fact that the quantum of recent slide in the rupee is not new. There have been three similar moves in recent years: 2008 (April-December: 17.5%), 2011 (August-December: 16.9%) and 2012 (March-June: 11.5%). The report said the market was, however, distracted by the US (2008-09) and the Euro-area (2011 and 2012) crises.
The economists Samiran Chakraborty and Anubhuti Sahay say India's external situation is not as precarious as it was in 1991. They say that adequate FX reserves, an eventual correction in the current account deficit, rupee depreciation, lower public debt and a structurally more robust and open economy should help India overcome the current challenges. Only a big policy mistake ahead of the upcoming election cycle would jeopardise the recovery, they say.
The report points out that India has $278.8 billion of forex reserves, against an annual current account deficit of $88 billion in FY13 and short-term external debt of $172 billion as of March 2013. The report said of the $172 billion, $87 billion is related to short-term trade credits; $50 billion is non-resident Indian (NRI) deposits, which are known to be sticky; and another $5 billion is sovereign debt.
The report said some pressure on the $30-billion of long-term overseas corporate borrowing coming up for redemption in FY14, and portfolio investment in the Indian debt market is possible, but the consequences should be manageable even if only some part is hedged.