The Hindu Business Line : Let adrenalin rule

After the flight of substantial FII money, it could be the turn of Foreign Currency Convertible Bonds to cause havoc to our forex reserves position.

S. Murlidharan

Adrenalin is a fight or flight hormone. It makes one either cantankerous for the nonce or make one take to one’s heels. In the past, economists have recommended fiscal stimulus to boost a sagging economy.

The Government, at the present juncture, should however allow itself to be possessed and governed by another stimulant, a natural one at that — adrenalin — to fight the incipient but potentially dangerous and debilitating foreign exchang e crisis.

Fickle inflows

The dramatic dip in foreign exchange reserves of the Government is attributed to flight of substantial FII money to where it came from. In a few months from now, it would be the turn of FCCBs (Foreign Currency Convertible Bonds) to cause havoc to our forex reserve position.

FCCBs, issued by the Indian corporates during the halcyon days of stock market boom in the fond but ostrich-like hope that there will not be any redemption pressure with foreign investors lapping up the conversion option with alacrity, could very well strain our resources now that redemption pressure would soon stare us in the face what with the stock markets destined to be in a comatose state.

FII investments, ECB mobilisations as well as FCCB all belong to the fickle category of forex inflows.

Our gushing enthusiasm in courting these sources alas is going to haunt us now that global capital is drying up and exports slowing down for want of fresh orders.

The falling prices of crude should not make one complacent given the volatile nature of the product which could very well exacerbate our foreign exchange crisis.

Two choices

In the event, the Government has just two choices both extreme like adrenalin. Fighting the incipient crisis would call for rolling back at least partially of some of the measures, such as permitting Indian corporates to invest abroad, allowing Indian residents to invest up to $2,00,000 and allowing Indian mutual funds to invest abroad.

Harking back to dirigisme is not a very palatable proposition for free market enthusiasts but then it is the duty of the Government to take vanguard actions to smother an incipient, may be a brewing, crisis without worrying about scathing criticism or approbation.

The other alternative is to heed the Mistry Committee, Raguram Rajan and others who have all been clamouring for ushering in full convertibility of the rupee so as to allow it to find its own level and thus call the dollar’s bluff. The fear of run on the rupee engendered by the possible scramble for harder currencies, according to them, is largely exaggerated.

One is not sure whether there would be a run on the rupee or not but simultaneous action in dethroning the dollar, especially by the oil exporting nations, could certainly bear out the full convertibility enthusiasts.

Fight or flight is certainly not a healthy proclivity but then when one is pushed to the wall he does not have a third choice. Some may describe the choice of full capital account convertibility as devil’s alternative while others could describe it as cutting the Gordian knot.

Whatever it is, if one has faith in the theory of impossible trinity there is no harm in having free flow of foreign exchange coupled with complete freedom to the central bank to alter monetary policies even though stable exchange rate would be a casualty which in any case it is.

(The author is a Delhi-based chartered accountant. blfeedback@thehindu.co.in)

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