RBI Policy to Downfall of Rupee

8/3/2019 RBI Policy to Downfall of Rupee

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/27/11 The Hind : Colmn / C.R.L. Naaimhan : Flip-flop in commnicaion

ehind.com/opinion/colmn/C_R_L__Naaimhan/aicle2747261.ece

Opinion Columns C.R.L. Narasimhan

Flip-flops in communication

C. R. L. NARASIMHAN

The steps taken b the RBI ill hae to be in harmon ith eisting macro policies

Afe a long peiod of ilence, he Reee Bank of India ook a nmbe of ep o check he fall of he ome of i ecen moe hae been iniging and o ome een inconien a ell.

A aeg o comba he falling pee on an gen bai i elcome.

Hoee, i i impoan o ake ino accon he likel impac of ome of hoe meae on he macoeBooing foeign echange flo ino India (o agmen ppl) i no dob impoan, b pecific epdiecion ill hae o be in hamon ih eiing maco policie.

If he do no, he ma cone an impeion of depeaion, hich he goenmen and he RBI oldlike o aoid.

Unfonael, policmake migh ell hae fallen ino ha ap. The goenmen ha annonced a nmelaaion ch a enhancing he ceiling on inemen in deb inmen (copoae bond and giliniional ineo, edcing he lock-in peiod fo foeign inemen in inface bond and einee ae cap on eenal commecial booing b Indian companie. Each of hee i ignifican b





would probably have found a place in the economic calendar over the next few years.

The problem arises because of a possible miscommunication. These ought not to be projected as necessasteps for rescuing the rupee at this juncture.

Since these measures have come at a time when overseas investors' belief in India's growth story has beethe declining stock markets and, of course, the falling rupee bear testimony to this — it is to be seen whe would have the same impact that they would have had in more normal times.

Encouraging foreign capital flows into debt markets is fraught with risks, a caution that the RBI has bee

until now.

There are existing concerns over the ballooning short-term external debt. Will not the greater leeway prIndian corporates to borrow from abroad increase the risks?

NRE depoi and abiage

The deregulation of interest rates on non-resident external accounts is intended to boost NRE deposits w banks. The attraction is that these funds come in from abroad.

Banks in India are now permitted to offer their non-resident customers the same rates they offer to theicustomers. This opens the possibility of large-scale arbitrage: the overseas Indians can raise dollar loanslow rates from a bank abroad and deposit them in Indian banks under the NRE scheme to earn fabulous

interest difference can be very large — even going up to 6 per cent. The risks are minimal. The NRE scheguarantee repatriation although they do not cover exchange rate risks. (FCNR accounts are maintained currency).

Past experience should warn us against relying on such deposits. They are known to flit in and out of Indinterest rate changes in India or abroad will impact immediately on the viability of the schemes built on

Tageing peclaion

In a surprise move, the RBI clamped down on speculation in the forward foreign exchange markets. It hcancellation and rebooking of forward contracts, placed limits on hedging by traders and foreign instituinvestors and reduced the amount of dollars that authorised dealers can hold overnight. In RBI's view, s

had the effect of weakening the rupee

As soon as these measures were announced on December 15, the rupee reversed its decline but by the befollowing week resumed its declining trend.

Effective economic management, including exchange rate management, anywhere takes into account psfactors that influence market forces.

The quality of central bank communication to the markets has become crucial to the success of monetarpolicies. In India too, there have been occasions when policymakers have successfully talked up' the rup value. During the recent bout of the rupee's weakness, the statements of senior government and RBI offithere are definite limits to intervention and that ,in any case, the central bank will not sell too many dol

the rupee, most probably undermined the central bank's belated defence of the rupee. A more beneficial strategy would be to stress on the positives, which India still has in plenty. The economfaltering but even a sub-7 per cent GDP growth rate will still be commendable. Foreign exchange reservecomfortable.

The recent upward revision by Moody's, of three key Indian debt instruments, shows that the India's ecoperformance is not all that bleak.

Keywords: Indian economy , rupee value, rupee stability , RBI policies, NRE deposits, currency value, mapolicies, macroeconomy

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RBI Policy to Downfall of Rupee