It is disappointing that the RBI has been resorting to short-term borrowings to ease the pressure on the rupee.

The recent RBI move, allowing Indian companies to resort to external commercial borrowings for repayment of rupee loans in India, is indicative of smugness, if not hubris.

Foreign currency borrowings in the current milieu of a badly mauled rupee do tantalise Indian companies, what with more rupees pouring in on conversion of the borrowings in dollars or euros. To wit, at the current exchange rate, every dollar of borrowing would translate into Rs 57. Indian debt to banks and others in India can be liquidated effortlessly, and the balance sheets of Indian banks would appear squeaky clean.

Short-lived joy

To the chagrin of the borrower, however, the joy would prove to be shortlived. Ask the ECB and FCCB (foreign currency convertible bonds) borrowers who pursued such myopic policies in the past. The dollar comes home to roost when the payback time is upon you, and the rupee has weakened further.

Suppose the tenure of the ECB is five years and at the end of it the rupee is down to 65. Indian companies will have to fork out Rs 8 more for every dollar of borrowing. Of course, the exchange rate risk can be hedged through forward or futures contracts and swap agreements, but those believing in the here and now don’t care for such precautions.

The RBI should proscribe ECB for rupee payments, unless the borrower has enough foreign exchange earnings to bank upon at the time of repayment, or has Reliance-like chutzpah to raise foreign currency loans for unimaginable durations — 50 to 100 years — that virtually shifts by several generations the repayment obligations.

Rbi’s remit

Indeed, it is disappointing that the RBI has been resorting to short-termism and short-term borrowings to ease pressure on the rupee. But then, the central bank’s remit does not go beyond this. It is for the Union Government to bring about policy changes that would spur foreign direct investment (FDI) — the remedy for the growing exchange rate problem. The other medicine, a surge in exports, does not present itself as a ready option in the immediate run, with the world economy still to emerge from the woods, and some important countries in comatose state.

One hopes the Prime Minister, who is going to wear the hat of the Finance Minister as well, makes bold to announce FDI in retail as well as the much-awaited hike in the FDI limit from 26 per cent to 49 per cent by foreign insurance companies. For a country that has a huge, unavoidable oil import bill to meet, the ultimate salvation lies in FDI and exports — both being non-repayable foreign exchange inflows.

The legitimate NRI remittances have run their course. Already in the region of $50 billion, there is not much headroom, especially with the Indian diaspora finding itself between a rock and a hard place. Willy-nilly, the Government has to turn its attention to the illegitimate money salted away by Indians abroad, squelching the moral dilemma involved.

The Government, however, should extract its pound of flesh for conferring immunity from prosecution, or for not asking any questions at all as to the source of the remittance. The investments could be in bonds of maturity of 25-50 years, redeemable at a predetermined exchange rate, say Rs 40, or the prevailing exchange rate at the time of maturity, whichever is less.

The Government should also tweak the gold deposit scheme launched in 1999 by the NDA Government, so that there are more takers for it.

The paltry interest of 1 per cent a year, coupled with the possibility of questioning by tax authorities as to the source of gold accumulation, has restricted its appeal to religious trusts that have piled up gold over the years and who are unafraid of the taxman, by and large. Attractive interest rates, immunity from questioning on par with those bringing in foreign funds and reparation for melting the gold would perhaps get the better of the resistance to the scheme.

The success of the scheme could lead to a sizeable reduction in import of gold, a definite drain on our fragile forex reserves. With huge gold reserves to show, the country’s currency would command better valuation. All said and done, the yellow metal remains the only beacon of hope for the world as it is.

(The author is a New Delhi-based chartered accountant)

(This article was published on July 3, 2012)
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