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Business News/ Opinion / Online Views/  Wanted: United show by RBI, government on rupee
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Wanted: United show by RBI, government on rupee

Conflicting signals by the govt and RBI are adversely affecting the rupee

As the local currency continues to depreciate, either RBI measures have failed or they are not the right measures. Photo: AFP (AFP)Premium
As the local currency continues to depreciate, either RBI measures have failed or they are not the right measures. Photo: AFP
(AFP)

The rupee fell 67 paise to a record closing low of 61.10 to a dollar on Friday despite a series of steps taken by the Reserve Bank of India (RBI) in the past few weeks to rein in the depreciation of the local currency. This is 38 paise lower than its previous closing low of 60.72 in the last week of June, but the rupee’s lifetime intra-day low was even lower—61.21 to a dollar recorded on 8 July.

After the local currency hit its record low in July, RBI first capped banks’ daily borrowing from its repo window at 75,000 crore, or 1% of banks’ deposits. This was accompanied by a hike in the bank rate as well as the rate of the marginal standing facility to 10.25%, making banks’ excess borrowing over and above 75,000 crore expensive. Besides, it also announced a plan to sell bonds under the so-called open market operations (OMO) to drain liquidity from the system.

When these measures didn’t work, in the second stage RBI capped individual bank’s borrowing limit at 0.5% of deposits. Along with that, it also made mandatory for banks to maintain 99% of the cash reserve ratio (CRR), or the portion of deposits that commercial banks need to keep with the central bank on a daily basis, against the earlier 70%. Banks keep 4% of their deposits with RBI in the form of CRR on which they do not earn any interest.

These measures shored up the currency, but just for a week.

So, RBI came up with another measure—making it mandatory for foreign institutional investors to obtain the consent of holders of participatory notes and derivative instruments before hedging.

All these are aimed at discouraging a punt on the currency, stamping out excess liquidity from the system, and jacking up the short-term interest rates. With the cost of money going up, speculators are expected to find punting on the currency expensive.

As the local currency continues to depreciate, either the RBI measures have failed or they are not the right measures. A section of currency analysts is saying the central bank’s diagnosis of the problem as well as the medicines administered are wrong as it’s not speculation but the gap in genuine supply and demand of the dollar driving down the currency. For a week before RBI’s mid-quarter monetary policy review, the rupee strengthened in sync with other emerging market currencies, and the central bank’s measures should not take credit for that. Similarly, the rupee has once again started falling against the dollar as the other emerging market currencies and RBI measures cannot stem the fall. The real medicine, they say, only the government can administer in the form of curbing imports and opening up sectors for foreign funds flow as the cause behind the rupee’s fall is India’s wide current account deficit and that’s one problem the government needs to address jointly with RBI.

The government and RBI have not been able to put up a united front so far. Both have been taking measures and trying to talk the rupee up, but there has not been any coordinated effort, something we had seen in the wake of the collapse of US investment bank Lehman Brothers Holdings Inc. and the credit crunch that gripped India along with the rest of the world.

Consider this: On 20 July, speaking in Moscow, RBI governor D. Subbarao told Reuters he had not so far been asked to stay on. “No offer has been made so far, so there is no question of accepting so far. It is a hypothetical question. As I said before, I must move on," Subbarao had said on the sidelines of a meeting of the world’s financial leaders. Little more than a week later, in end July, finance minister P. Chidambaram in Delhi said at a press conference, “The governor met me about six or seven weeks ago...and he (Subbarao) said that he would like to move on and he would not like to be considered for another extension. I accepted that... That is where the conversation ended. We are now in a search-cum-selection mode of the new governor."

Both Subbarao and Chidambaram are saying the same thing, but there is a nuanced difference between what they meant. While Subbarao said nobody has approached him to stay back (meaning, had he been approached, he might have said yes), Chidambaram said the governor did not want to be considered for another extension (meaning, had Subbarao wanted, the government could have given him). For the record, Subbarao—whose term ends on 4 September—had got a two-year extension in 2011.

If the government and RBI are serious about curbing the rupee’s depreciation and bringing back stability in the currency market, both need to put up coordinated show of complementary fiscal and monetary measures. In its monetary policy review, RBI had hinted at resuming its monetary easing and rolling back the liquidity-tightening measures after normalcy returns to the currency market without giving any time frame for that. The rollback should be linked to a calendar of measures the government commits to take to bring down the current account deficit.

I have seen married couples fighting with each other like dogs in the bedroom, but holding hands in social circles and taking part in made-for-each-other shows for their children’s sake. The finance ministry and RBI should follow that example for the greater good of the nation. When Subbarao says RBI has serious reservations about floating a sovereign bond, and the finance ministry says such a bond is one of the ideas that’s on the government’s table, they are sending conflicting signals. That’s not good for the rupee.

Tamal Bandyopadhyay keeps a close eye on everything banking from his perch as Mint’s deputy managing editor in Mumbai. He is also the author of A Bank for the Buck, a book on HDFC Bank. Email your comments to bankerstrust@livemint.com

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Published: 04 Aug 2013, 03:32 PM IST
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