Instead of administering the wrong medicine, both RBI and govt should give up hope of talking the rupee up
The rupee did not care much for finance minister P. Chidambaram’s measures to prop it up. The local currency opened weaker on Tuesday. At the time of writing this blog—12.15 pm—the rupee was trading at 61.44. to a dollar, some 18 paise lower than Monday’s closing level of 61.28.
It’s pretty clear now that neither the Reserve Bank of India (RBI) nor the government can talk the rupee up. Both are fighting a losing battle.
Chidambaram on Monday announced that the government would soon unveil measures to curb imports of gold, silver, oil and non-essential items and increase customs duty on some luxury items, without naming them. He also said public sector financial institutions would raise proxy sovereign bonds and norms for NRI (non-resident Indian) deposits would be liberalized, among a few other measures. But the currency gave a cold shoulder to the announcement as it had done in the past to the RBI’s measures. One of the reasons behind this is the hype that typically surrounds such measures which is always much bigger than the measures themselves. So the market gets disappointed.
Since mid-July, the central bank has announced a series of measures to curb volatility in the currency market and kill speculation but the rupee doesn’t seem to bother much.
This is the biggest ever currency crisis we are experiencing since 1997. In the past 16 years, the market has grown many times, the players have become extremely sophisticated and one cannot talk the rupee up any more.
Meanwhile, RBI has been draining liquidity through short-term cash management bills and the gap between the yield on a 91-day treasury bill and the benchmark 10-year paper has been widening to over 3.5 percentage points. Such an inverted yield curve has rarely been seen. If RBI continues to drain liquidity and the short-term yields firm up even further, there will be a spillover effect and interest rates in the longer end of the market will surely rise. That will kill growth. Instead of administering the wrong medicine, both the central bank and Indian government should give up hope of talking the rupee up. They should allow the currency to find its own level.
Banker’s Trust Realtime is a frequent blog by Tamal Bandyopadhyay, who writes a popular weekly column Banker’s Trust.