With the steep fall in the value of the rupee against the dollar strident voices are heard once again for RBI intervention. As on May 31, 2013, its total forex reserves amounted to $288 billion, of which foreign currency assets of $259 billion can be used for market intervention.

Keeping in view the daily turnover in the market, advocates of the policy should indicate the magnitude and duration of intervention to produce a lasting impact, before the RBI runs out of reserves a la Thailand during the East Asian Crisis. Remember the reserve loss in recent times due to dollar sales from which RBI has not recovered?

Western countries gave up intervention long ago, realising its futility. Currently, the Swiss National Bank is doing it to defend the exchange rate at the minimum of SFr 1.20 for Euro. But it is fighting against the appreciation of its currency with a decline in exports and prospects of deflation. China is able to maintain its exchange rate pegged to dollar but then it has more than $3 trillion of reserves. Any action by the RBI will have some effect for a few days, after which it will be back to square one, depending on the fundamental factors relating to the inflow of capital, the progress of the monsoon, etc.

In the meantime, it would have lost reserves substantially and irretrievably for the near future. Further, the sale of dollars will absorb rupee liquidity, calling for compensatory debt buyback operations that would increase the net RBI credit to government, resulting in retroactive financing of past fiscal deficits.

Since gold is a major factor in our current account difficulties, the Government should ban its import for three months with an exemption for the export sector. Will it lead to smuggling and hawala transactions in forex?

As on June 11, 2013, the international price of gold was $1,369.29 per troy ounce or Rs 26,000 per 10 gm using an exchange rate of Rs 59 to a dollar. The Indian price was Rs 28,515 per 10 gms. Could there be about 1000 tonnes of imports in a year through smuggling to meet the local demand with a price differential of Rs 2,500 per 10 gms, excluding all other costs and the risk element?

The profit is around 10 per cent. So far, smuggling of limited quantities has been reported from airports. Smuggling through the seas during the next three months would be hazardous.

Given the attractive exchange and interest rates on the deposits of NRIs and the additional duty-free limits for them to carry jewellery, will they resort to hawala transactions?

Read also: Should RBI defend the rupee? Yes

(The author is a Mumbai based economic consultant.)

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