The Hindu Business Line : Rupee confusion mars wise moves

It is a wise decision by the RBI not to have raised the Bank Rate. And it has rightly shown concern over the share of credit to infrastructure. But the RBI's policy on rupee continues to confuse the market.

THE RBI Review is broadly on expected lines considering the developments taking place in the Indian and global economy.

The main challenge before the RBI is rising inflation, as measured by the Wholesale Price Index. Though inflation receded from 6 per cent to 4.6 per cent, containing it is difficult on account of the rising oil and commodity prices. The RBI would be hard pressed to contain the inflationary pressures and keep the growth momentum.

It is a wise decision by the RBI not to have increased the Bank Rate. However, the raising of the reverse repo rate by 25 bps, will push up the cost of borrowing on short-term money market instruments — the commercial paper. Short-term money becoming expensive is bad news for the corporate world.

There is a substantial increase in non-food credit and it is expected to be higher than the projected 19 per cent. Hence, the busy season, from October to March, will see increased credit off-take and it will be important for the RBI to maintain sufficient liquidity in the system so as to provide credit to the commercial sector and allow the Central Government to complete its borrowings without putting pressure on interest rates, especially when the borrowing is expected to be larger than budgeted. Moreover, given the US interest rate scenario, domestic companies will borrow locally for their capex cycle as the interest rate differentials has narrowed significantly.

The RBI has rightly shown concern over the share of credit to infrastructure, which is relatively low, given the size and the state of economy. The RBI should use the $143-billion forex reserves for onward credit to the infrastructure sector. A beginning has been made by the RBI by treating the Special Purpose Vehicle (SPV) set up to finance infrastructure companies as financial institutions and considering the External Commercial Borrowings (ECBs) raised by such entities by the approval route.

The RBI's policy on rupee continues to confuse the market. In the last two months the rupee has depreciated over 3 per cent, whereas earlier in the year the RBI was constantly buying rupee to accumulate forex reserves. A stable currency is very much the need of the hour, more so, when India is becoming the chosen destination for investment. Concerns over currency in the minds of the investing community will be detrimental to attracting foreign direct investment (FDI).

We really need to work towards attracting larger FDI for sustaining and accelerating the growth of the economy. In view of this, it is imperative that the RBI keeps the value of the rupee steady, against the dollar in particular. It is more a barometer of good health and policies than a forex issue.

Though late in the day, the RBI has decided to permit short-selling in government securities for intra-day exposure. It will be good, if eventually, the RBI sheds its reservation on short-selling of government securities completely and allows the market forces to determine their true value.

The proposal to allow banks to increase their capital market exposure and update the real effective exchange rates indices (REER) to a new 6-currency indices are welcome moves.

(The author is Executive Director, Gujarat Ambuja Cements Ltd.)

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