The Hindu Business Line : Why can't RBI lend dollars?

MOST FOREX TRADERS see the rupee appreciating strongly against the dollar in the next six months. The Reserve Bank of India has been doing its best to slow it down by buying up surplus dollars in the market. The RBI is not entirely uncomfortable with the pile-up of reserves going by a recent pronouncement of its Deputy Governor, Ms K. J. Udeshi, that China has more dollars in its wallet than India. The RBI also is at ease with a rupee-dollar movement of 5 per cent either way, but the recent surge in the rupee on Mint Street, fuelled mainly by the subscriptions to the initial public offer of ONGC alone attracting a billion dollars, must set the RBI thinking on how better to use the inflows.

The central bank has been routinely buying up dollars and soaking up the resultant rupees by selling government securities but is now running short of government paper; this in part explains the RBI's absence in the market in recent days. A strong exporters' lobby curbs the central bank from proceeding with a market-determined rupee-dollar value even as a strong rupee makes imports comparatively cheaper, softening the impact of high international crude prices. Inflation is stable at around 5 per cent as the oil companies are absorbing the rise in crude prices. To reduce the impact on engineering units, steel manufacturers have agreed to a uniform cut in prices suggesting the working of a cartel with the blessings of New Delhi.

With general elections nearing, the Government seems to be getting public sector outfits to push and work its agenda, and the RBI is aware that price levels will go up post-elections. The central bank does not favour surplus rupee funds chasing goods to push up prices and that may also not happen if one goes by the whispers in banking and industry circles of a sharp pick-up in corporate investments by the next fiscal, probably after the Budget. If the upbeat mood leads the economy to the shop-floor, rupee liquidity could evaporate, and the RBI managers will have more time for other issues. For a start, the central bank could think of directly lending (short and long) dollars from its reserves to banks at the prevailing inter-bank rate to be on-lent to industry and agriculture at around 5 per cent and kill the appetite for external commercial borrowings, which are easier priced. Some bankers seem to have talked over the idea with the central bank and were apparently told that the RBI could not be seen doing the job.

No doubt, central bank orthodoxy went with the scrapping of the gold standard, but the RBI can at least re-visit the idea. It could be earning more on the dollars it buys from the market and also aid growth. Most banks have used up FCNR(B) funds, as corporates look for dollars at international rates, considering the near-five percentage point cost differential between dollar and rupee funds. There could be some legal hurdles but as an operative procedure to get investments going, the idea of the RBI lending dollars to banks does sound reasonably attractive. If the current trend in GDP growth has to be even maintained, fresh investments will have to be funded at international interest rates and not at an average PLR of 10.25-10.50 per cent. That is prohibitive.