The rupee has virtually maintained a daily slide against the . dollar since the first week of June. From January to May this year it oscillated between 52 and 54 against the dollar. But in early June, due to very heavy demand for dollars from oil marketing companies in India and importers of capital goods, made worse by outflows by FIIs, the rupee sank to a low of Rs 61 to a dollar in an interval of just four or five days. Alarmed at this steep fall, the Reserve Bank (RBI) intervened by making available dollars from its reserves through commercial banks. That provided a temporary reprieve. Soon the rupee fell to to Rs 61 during the first week of July.
Importers started worrying, oil marketing companies blinked, and the country’s Finance Minister was nonplussed. The RBI again moved and introduced measures to curtail and contain liquidity in the monetary system, along with occasional sale of US dollars from its reserves. Even that did not contain the rupee fall. Former chief economic advisor Kaushik Basu advised the RBI to release dollars from its foreign currency reserves of about $280 billion to stem the rupee's fall. Yet another suggestion was to lease 200 tonnes of gold in RBI’s vaults to IMF. Curbing imports of non-essential items and gold is was another measure put into effect. These will provide only temporary relief. The real issue is the widening current account gap.
Despite all efforts, we are unable to increase our exports or find new markets.
On the other hand, imports continue to surge. Major items of imports like crude, coal, capital goods and edible oil are necessary to sustain our economy.
NO TAKERS FOR RUPEE
When there is a demand for dollars from oil marketing companies and other importers, the consideration for the required quantity of dollars is paid in Indian rupees through operations with commercial banks. But unfortunately, there are not many banks or financial institutions outside India who are eager to own rupees by parting with dollars. This is the major hurdle to free availability of dollars, leading to its rising value against the rupee. The short-term external debt of $172 billion, to be repaid by India before March 2014, will also determine the rupee’s future course. Given the high CAD now, India will really find it difficult to meet its repayment obligations on the short term loan. Perhaps to avoid any cloudburst later, India may think of going in for a substantial foreign currency loan on a long-term basis from IMF or any other friendly country, for which negotiations may begin now.
( The author is a retired senior executive, Standard Chartered Bank .)