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2012 is not 1991. So, the government mandarins and the Reserve Bank of India say every time one asks about the deteriorating macro-picture. ‘Our position is not that precarious', is the message they want to convey.
But the steps being taken to address various problems only heighten the eerie similarities in the macroeconomic situation. Certainly, we seem to need foreign exchange now as we did then.
The RBI hiking interest rates on FCNR (B) deposits on Friday to attract funds from NRIs is reminiscent of the steps taken in early 1991, when the country faced a full-blown balance of payments (BoP) crisis.
In 1991, NRI deposits shrank to a mere $0.3 billion. NRI deposits were $58 billion as of end-February 2012. (Remember, however, that these deposits are fully repatriable and could go out as fast as they did in 1991.
It's often been said that their pull-out exacerbated the crisis in 1991.) History repeats itself, even if partially. On Friday, the RBI increased the interest rate ceiling on FCNR (B) deposits to 200 basis points above LIBOR for one-to-three year deposits and to 300 basis points above LIBOR for three-to-five year deposits. Simultaneously, the ceiling rate on export credit at LIBOR plus 350 basis points has also been removed with a view to improving availability of export credit in foreign currency.
Tweaking rates
The RBI has been tweaking these rates to adjust the inflows from NRIs as and when we needed the money.
In 2007 and early 2008, when other forms of capital inflows were coming in, their rates were down to LIBOR minus 75 bps. Subsequently, as these flows started drying up, the rates have once again started moving up (see table).
The RBI had also deregulated rates on Non Resident External (NRE) deposits (that are maintained in rupees) in December 2011, following which there was a surge in NRI deposits.
NRE deposit rates which were around 3 per cent per annum rose to 9 per cent within the span of a week. About $3.5 billion came in during January and another $1 billion in February.
These inflows kept the rupee firm and even reversed the decline it had suffered in 2011, when it touched a low of 54.20.
After the NRI deposits surge, the rupee touched 49 to the dollar by mid-February.
There has, however, been a steady fall in the rupee over the past three months, mirroring the economic mood. It closed at 53.47 on Friday.
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