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\u2019s lifetime intra-day low was even lower\u201461.21 to a dollar recorded on 8 July.
\nAfter the local currency hit its record low in July, RBI first capped banks\u2019 daily borrowing from its repo window at Rs.75,000 crore, or 1% of banks\u2019 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\u2019 excess borrowing over and above Rs.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.
\nWhen these measures didn\u2019t work, in the second stage RBI capped individual bank\u2019s 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.
\nThese measures shored up the currency, but just for a week.
\nSo, RBI came up with another measure\u2014making it mandatory for foreign institutional investors to obtain the consent of holders of participatory notes and derivative instruments before hedging.
\nAll 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.
\nAs 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\u2019s diagnosis of the problem as well as the medicines administered are wrong as it\u2019s not speculation but the gap in genuine supply and demand of the dollar driving down the currency. For a week before RBI\u2019s mid-quarter monetary policy review, the rupee strengthened in sync with other emerging market currencies, and the central bank\u2019s 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\u2019s fall is India\u2019s wide current account deficit and that\u2019s one problem the government needs to address jointly with RBI.
\nThe 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.
\nConsider this: On 20 July, speaking in Moscow, RBI governor D. Subbarao told Reuters he had not so far been asked to stay on. \u201cNo 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,\u201d Subbarao had said on the sidelines of a meeting of the world\u2019s financial leaders. Little more than a week later, in end July, finance minister P. Chidambaram in Delhi said at a press conference, \u201cThe 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.\u201d
\nBoth 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\u2014whose term ends on 4 September\u2014had got a two-year extension in 2011.
\nIf the government and RBI are serious about curbing the rupee\u2019s 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.
\nI 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\u2019s 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\u2019s on the government\u2019s table, they are sending conflicting signals. That\u2019s not good for the rupee.<\/p>\n","protected":false},"excerpt":{"rendered":"
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