Rupee tantrums

| Updated on September 11, 2018 Published on September 11, 2018

The focus should be on long-term reforms to plug the current account gap

With the falling rupee and rising fuel prices turning into a burning political issue, the Centre seems to have urged the Reserve Bank to defend the currency. However, a measured rather than knee-jerk response is in order, even as the pain cannot be dismissed lightly. By falling 12 per cent against the dollar since January 1 this year, the rupee stands out as the worst performing Asian currency even as currencies of emerging economies the world over have taken a hit. Over the last month alone, the rupee lost 5 per cent against the greenback, while other Asian currencies remained quite stable against the dollar. During this period, crude prices shot up from $64 a barrel to cross $70 at one point. If oil prices remain firm, the current account deficit, at 2.4 per cent of the GDP in the first quarter of this fiscal against 2.5 per cent last year, is slated to be in the region of 2.8 per cent towards the end of this fiscal. When seen against the drying up of capital flows in April-June this year — net foreign portfolio investment (FPI) fell by $8.1 billion against a corresponding rise of $12.5 billion last year, while foreign direct investment amounted to $9.7 billion in Q1 2018-19, against $7.1 billion last year — the financing of the CAD may lead to pressure on forex reserves. In fact, FPI flows in equity and debt had turned positive in August, only to turn negative in both the segments in September. Hence, the rupee is not exactly poised to bounce back to mid-60 levels in a hurry, even if it is not in for a free fall.

However, the taper tantrum experience of 2013 informs us that intervening heavily to prop up the rupee can prove to be counterproductive. The RBI has so far displayed the right composure, by keeping its interventions to a minimum. As a result, forex reserves remain at mid-August levels of $400 billion. The central bank should focus on inflation control in order to restore investor sentiment. Import-intensive sectors such as telecom and aviation may see costs increases, even as export-driven sectors such as IT and pharma stand to gain. A further fall can be checked by staggering importers’ payments and issuing NRI bonds. These measures can check speculative run on the currency, akin to that witnessed in 2013 when selling by traders in rupee non-deliverable forward market overseas dragged it to ₹68.8 against the dollar.

In the long run, it is important to keep a tab on external commercial borrowings (which account for 38 per cent of the total external debt of $530 billion) and ensure that they are hedged for currency risk. India’s CAD problem is best addressed by ensuring that exports move up the value chain. As for oil imports, energy efficiency in transportation and industrial applications require urgent attention. Gold imports can be controlled, while on the capital account India should remain focussed on attracting long-term FDI in greenfield areas. Such structural changes will equip us to ride out externally-induced financial tremors.

Published on September 11, 2018

A letter from the Editor

Dear Readers,

The coronavirus crisis has changed the world completely in the last few months. All of us have been locked into our homes, economic activity has come to a near standstill. Everyone has been impacted.

Including your favourite business and financial newspaper. Our printing and distribution chains have been severely disrupted across the country, leaving readers without access to newspapers. Newspaper delivery agents have also been unable to service their customers because of multiple restrictions.

In these difficult times, we, at BusinessLine have been working continuously every day so that you are informed about all the developments – whether on the pandemic, on policy responses, or the impact on the world of business and finance. Our team has been working round the clock to keep track of developments so that you – the reader – gets accurate information and actionable insights so that you can protect your jobs, businesses, finances and investments.

We are trying our best to ensure the newspaper reaches your hands every day. We have also ensured that even if your paper is not delivered, you can access BusinessLine in the e-paper format – just as it appears in print. Our website and apps too, are updated every minute, so that you can access the information you want anywhere, anytime.

But all this comes at a heavy cost. As you are aware, the lockdowns have wiped out almost all our entire revenue stream. Sustaining our quality journalism has become extremely challenging. That we have managed so far is thanks to your support. I thank all our subscribers – print and digital – for your support.

I appeal to all or readers to help us navigate these challenging times and help sustain one of the truly independent and credible voices in the world of Indian journalism. Doing so is easy. You can help us enormously simply by subscribing to our digital or e-paper editions. We offer several affordable subscription plans for our website, which includes Portfolio, our investment advisory section that offers rich investment advice from our highly qualified, in-house Research Bureau, the only such team in the Indian newspaper industry.

A little help from you can make a huge difference to the cause of quality journalism!

Support Quality Journalism
This article is closed for comments.
Please Email the Editor
You have read 1 out of 3 free articles for this week. For full access, please subscribe and get unlimited access to all sections.