The Hindu Business Line : Rising rupee leaves RBI poorer by Rs 65,000 cr

Mumbai, Sep.1 That the Reserve Bank of India’s portfolio of foreign currency assets has taken a hit in the wake of rupee’s appreciation against foreign currencies is known. But the size of its portfolio erosion has only been a matter of conjecture. Now there is confirmation of the extent of the loss from the Bank’s Annual Report released recently.

The Bank says that appreciating rupee has drilled a Rs 65,000 crore hole in its balance sheet as of June 2007.

The Bank says it had as on June 30, 2006, Rs 86,789 crore as cumulative gains — principally on its holdings of foreign currency assets. But that this figure had dipped to Rs 21,724 crore as on June 30, 2007. “ … there was depletion of Rs 65,056.66 crore in CGRA (Currency and Gold Revaluation Account) thus decreasing its balance…. .”

The Bank attributing it to dollar depreciation says, “The decrease was on account of depreciation of US dollar against Indian rupee calculated on an increased level of foreign currency assets during 2006-07.”

The latter part of the Bank’s admission is significant. It concedes that the loss arising from the rupee’s appreciation against the US dollar is exacerbated by additional dollars that it mopped up during 2006-07.

Ironically, it is also the period when there was a general criticism that the Bank was not doing enough to stem the appreciation . A criticism that has been particularly strident from the textile and small and medium-scale software exporters who felt that their competitive ability has been severely eroded.

So what lies ahead? The Bank says that the balances in the account meant for setting off losses in the future due to Rupee’s further appreciation is now down to just 2.5 per cent of its foreign currency and gold holdings. In other words, any rise in appreciation beyond this percentage would wipe out the reserves completely. In the two months since the close of the year (June 30, ’07) the Bank’s intervention has staved off such a prospect with the rupee ruling marginally lower.

But the threat has far from abated. Forex dealers and institutional investors have been talking of the rupee finding its level at Rs 37 to a dollar in a year’s time.

Of course, it is not the first time the Bank has had to dip into Revaluation Account. It had happened in 2004-05 (See table) as well. But the latest dip is much sharper.

A surge in demand for dollars from higher investment outlays, especially in key infrastructure sectors, would be an answer to the Bank’s prayers. It eliminates the need for the Bank’s intervention in the forex market to stabilise the value of the rupee at a time when continued enthusiasm of foreign investors (portfolio and direct investments) rather than temporary imbalances in inflows and outflows of foreign currency is the cause of rupee’s recent gains.

But accelerated investment is clearly not in its hands but rather with the Government.

Elsewhere in the Annual report, it has talked of the need for removal of infrastructure constraints, improving investment climate, stepping up growth in agriculture etc. It says that progress in these critical elements will help resolve the dilemmas that were faced in 2006-07. That is as close to the Bank telling the Government that the ball is in the latter’s court as you will ever get.

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