While industry has been asking the Government to use the country's foreign exchange reserves to prop up the falling rupee, the Government and the Reserve Bank of India appear to have opted for a more cautious stance, of conserving foreign currency reserves for the moment. The rupee hovered around Rs 52 during intra-day trading on Thursday.
According to highly placed sources, the Government has zeroed in on a framework for the rupee. This has been achieved after many rounds of talks between the Prime Minister, Dr Manmohan Singh, the Finance Minister, Mr Pranab Mukherjee, the Chairman of the Economic Advisory Council, Dr C. Rangarajan, and the RBI Governor, D. Subbarao, over the last couple of days.
Reserves will deplete
The key of the framework lies in intervention in the local forex market by the RBI. Both the Government and the RBI appear to be on the same page about lesser intervention. “If you go to the current market even with $300 billion of reserves, this will disappear in very little time without creating significant impact for the longer term,” a person familiar with the developments said.
He said that the framework is expected to focus on three aspects. First, keeping the current account deficit within 2.5 per cent of GDP. Second, rationalising imports. And, third, removing various procedural bottlenecks for increasing dollar inflows.
Neither the Government nor the central bank is believed to have thought of a particular level for the rupee. However, at any point of time, the RBI is free to intervene and it is doing so, the source said.
RBI initiates action
Meanwhile, the RBI has already swung into action. On Tuesday, it asked corporates to immediately bring in the proceeds of their External Commercial Borrowings (ECBs) for rupee expenditure in India, such as local sourcing of capital goods, on-lending to self-help groups (SHGs) or for micro-credit, payment for spectrum allocation, and so on.
At the same time, the bank has raised the interest rate on Non-Resident (External) Rupee (NRE) term deposits for one to three years maturity by 100 basis points. Interest rates on Foreign Currency Non-Resident (Banks) deposits by 25 basis points, which should tempt NRIs to park more of their savings in India.
Forex losses
The rupee has weakened by over 18 per cent between January and November. This can result in ‘disastrous' December quarter results, as Indian companies will have to bear an additional burden of Rs 27,000 crore,” Mr Jagannadham Thunuguntla, Head of Research with SMC Global Securities, said.
He clarified that as per the Institute of Chartered Accountants of India (ICAI) guidelines, mark-to-market losses on forex need to be provided for on a quarterly basis in the financial statements. This will make life difficult for companies which are already facing huge pressure on margins.