The Hindu Business Line : Spring in the rupee

IT IS SPRING and the economy is on song. There is spring in the rupee too, reflecting the good times in the economy. Economic reforms, in the coming months, can only get more dollars flowing in, going by the response to the 10 per cent disinvestment of government shares in ONGC. Neither the Finance Ministry nor the Reserve Bank of India anticipated the response of the portfolio investors to the ONGC IPO and other issues.

The central bank thought it prudent to duck the rush of dollars in the last week of March rather than ineffectively play the market. Dollars are exchanged for rupees by the RBI and commercial banks, with the central bank thereafter mopping up the rupees with the sale of government securities. The RBI could not persist with this rather unproductive operation, unsure as it was of its thinning stock of government securities being able to mop up the rupees in the market. With the start of the new financial year, the RBI will be armed with Rs 60,000 crore of market stabilisation bonds to soak up rupees thrown up by dollar flows.

Yet the RBI needs to examine other ways to handle the dollar deluge; surely, thinning the flow would be one of them. In past three months, companies have borrowed over $2 billion overseas, attracted by low interest rates. Can the RBI not think of allowing banks to buy dollars from the market to offer dollar-to-dollar loans to corporates at Libor-related rates to deter them from going for external commercial borrowings? As of now the RBI is quite comfortable building dollar reserves in anticipation of IMB (India Millennium Bonds) worth some $8 billion coming up for redemption in 2005, apart from pre-paying sizable government debt. A rising rupee does hurt exports but the exporting community will have to live with it for a while taking solace for now from cheaper imports.

The global uncertainty over commodity prices, the status of the monsoon and the stand of the new government on pushing reforms are the three factors that the RBI thinks could determine growth. But it is equally confident that even if the three parts of the equation turn negative, the GDP growth will be around 6 per cent for 2004-05. Indian Inc is no more in a sulk and most bankers expect a rise in credit offtake after the Union Budget is presented. Infrastructure investments by the private sector could get stronger in power, roads and ports going by the financial closures for a few electricity projects. The RBI is quite confident of the manufacturing sector leading the growth charge this year though for that to sustain farm policy changes are a must. State governments are yet to free agriculture markets while the rural credit delivery system does not provide funds at anything near the interest rates that corporates pay. Banks link corporate funding to market rates while for the farm and services sectors it is at the Prime Lending Rate. Sustaining growth and not battling a rising rupee, which seems to be here to stay, should be of more concern for financial managers in 2004-05.