The Hindu Business Line : Fast forward

NOT LONG AGO, speculation in the forex markets was not taken to kindly by the Reserve Bank of India. Now, the central bank is just about short of sanctioning speculation. Forex reserves, like good Christmas tidings, are piling up with RBI donning the merry visage of Santa Claus and it is not the time to quibble over mores and norms. Most of the substantial relaxations add up to raising the caps on various forex products used by the markets with the central bank quite eager to give up discretionary powers. Banks can freely offer currency-rupee swaps against the earlier provision of a $50-million cap on these products. Corporates can scrap and re-enter into unlimited forward contracts while earlier the facility had a cap of $100 million per financial year. Foreign direct investments and Tier 1 capital of foreign banks can be hedged but the option may not generate a strong dollar as most (as earlier feared) do not want to quit; the comfort of the facility is enough to calm the nervous.

Earlier, a rise in world crude prices sent rupee values diving against the dollar, but the same event today does not entice anyone to hold dollar positions. Interest arbitrage could explain a bit of the dollar inflows with Indian interest rates still many tads above US quotes. Some bankers also see corporates unwinding secret dollar holdings outside India to explain the high tide. Players see a one-way movement in rupee values, like their bretheren in the debt markets who do not see a rise in yields till the end of the current financial year.

Possibly, the Indian economy has changed markedly to take on internal and external knocks leaving aside the scares and scars of the past. Going by some of the numbers put out by various agencies, corporates seem to be doing better than at any time in the last three years, and the farm sector is doing better than expected, despite unhelpful weather. Some corporates are managing with less bank funds, having learnt to live with a rupee longer. Yet, bankers are upset over the absence of any fresh investment proposals to absorb dollars. Is there any need for new steel or power plants when lifting the capacity utilisation of existing units could wipe off shortages? If power to the farm sector is allowed to be priced, State electricity boards could become bankable propositions.

Neither the Centre nor the State governments need to look beyond the recently put out India Infrastructure Report 2003. If water, power and road transports are at least partly-priced, if not fully, banks can accommodate the demand for funds from public utilities. Even the very act of public disinvestment could get dollars. In the first instance, economic reforms can only get the economy to consume factors of production efficiently and the extant liquidity (dollar and rupee) should help. Going by the pace on the forex side, the RBI has rendered most parts of the Tarapore committee report on full float redundant. The central bank can go beyond if the Government is denied the free facility of pocket-money.

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