The Hindu Business Line : Rupee reverses

In times of surging crude prices, jumpy financial markets can but be the norm. If the Reserve Bank of India buys dollars in the foreign exchange market, as it has done for 20 of the past 25 weeks taking the foreign exchange reserves from $139 billion to $163 billion, the rupee will depreciate making exports cheaper and imports costly; it will be the reverse if the RBI sells dollars.

An intervention of the type during the East Asian crisis, in the event of crude oil prices climbing further, could trip markets and deprive the RBI of any street signals. That strategy may not be possible today with corporates acquiring entities abroad to beat any flip-flop in the rupee; also, company treasury managers are busy seeking forward cover or buying options to protect dollar earnings. That leaves the farm sector whose prices are mostly determined by diktats from New Delhi. The current inflation (still within the RBI-prescribed range of 5-5.5 per cent) seems more a supply side anomaly with wheat and other commodities turning scarce. Any fall in the rupee will make their imports dear, spooking the price indices. Over the last one year and more, the RBI has been marking up interest rates to contain any price scare, with the markets and the banking system following suit. The Chief Economic Adviser to the Government, Mr Ashok Lahiri, feels the interest rates, currently on a high, are not so prohibitively steep as to kill growth. Last fiscal there was a credit growth of 30-32 per cent, this year it is running at 20 per cent. For Mr Lahiri any complaint about the dip is an indicator of ambitious expectations. Is the drop due to corporates seeking cheaper monies abroad? Or, how does one explain that banks on July 20 placed over Rs 47,000 crore with the RBI to earn a risk-free income of 5.75 per cent? Add the liquidity held up under the Market Stabilisation Scheme, it will be a bit inconvenient to explain the link between high interest rates and surplus cash. Or, is it that the corporate sector has got around the crunch, lessening the impact of RBI's high interest rate stance?

Banks can help but they appear keen on battening their loan books. Short-term farm loans will cost 7 per cent, thanks to government subsidy, while long-term money is way above the 10 per cent mark. The gap between deposit and fund rates still rules at an unacceptable 3-4 percentage points and bankers are wary of pruning margins. Paying 3.5 per cent interest on savings accounts, banks should be making a neat 2.25 percentage points by parking funds with the RBI. That helps the banking system but not the economy's growth. Indeed, some pet axioms ruling the financial world are up for questioning.