The value of Indian rupee has depreciated by over 27 per cent against the US dollar since April 30 when it was trading at Rs 53.80. Discounting the one-off recovery on Thursday when it bounced back to Rs 66.60, it was back at trading at Rs 67.7 on Friday. In spite of the Reserve Bank of India (RBI) and the government taking various policy measures to prop up the demand for the sagging rupee, it continues to be unrelenting.
The reasons for the falling rupee are the high current account deficit compared with that in other emerging markets which are also witnessing a decline in their currencies and the pull back of foreign institutional investors.
The sharp weakness of the rupee seen over the last several months also gets reflected in the slump in industrial activity and the spike in WPI inflation. Standard Chartered Bank has revised the GDP growth forecast for FY14 to 4.7 per cent from 5.5 per cent and notes an upside risk to the average WPI inflation projection of 5 per cent and the fiscal deficit target of 4.8 per cent of GDP for FY14.
The compilations of key options for strengthening the rupee are as suggested by rating agency CARE as well as economists from Bank of America Merrill Lynch (BAML), Standard Chartered Bank and FirstRand Bank.
1) Proactive steps by RBI to rebuild forex
RBI will have to take far more pro-active steps to rebuild FX reserves to make up for not buying FX in the second half of 2009 to first half of 2011.
This is a priority because India's import cover has halved to seven months—a level last seen in 1998—in the past five years, below the eight to 10 months needed for rupee stability. Economists believe in launching a scheme to attract chunky FX inflows through non-resident Indian (NRI) deposits, sovereign bonds, Foreign Currency Non-Resident Accounts (FCNRA) deposits, etc.
Banks such as Federal Bank, Catholic Syrian Bank and Indian Overseas Bank have historically received a chunk of their deposits from NRIs and attractive rates to this effect should increase dollar inflows. Some banks have increased the interest rates on some NRI deposits this month to bring in more funds following announcement of liberalised norms by RBI.
Indranil Sen Gupta, economist with BAML, estimates that RBI would be hard pressed to sell $25 billion and every dollar sold will likely only raise further questions about the adequacy of FX reserves and pegs rupee fair value at Rs 51.1 versus the dollar.
2) Reduce imports further
One way to squeeze imports further is to increase domestic price of diesel which could probably temper down the oil bill which is being pressurised by the signs of an increase in global prices, suggests Madan Sabnavis, chief economist of CARE Ratings.
Considering that gold and silver imports have declined substantially following import duty hikes and tighter import restrictions, exports should also benefit from the pick-up in global growth. The sectors that are expected to lead the pack are pharma, textile and information technology.
3) Issuance of sovereign bond
This option gets a mixed response from industry veterans. Krishnamoorthy Harihar, treasurer of FirstRand Bank, says the option would further complicate the process if the coupon rate of the issue gets volatile. As long as the government takes a pro-GDP stance and help enhance confidence in the market, the industry would take care of the rupee stabilising, he said.
CARE suggests that the government should go for a sovereign bond issue with a target of $20-30 billion. However, the chances of a sovereign bond issue diminished when RBI increased interest rates on some NRI deposits. But this option is still open.
“Indian rupee is expected to extend its decline in the near future as RBI measures alone would not lead to a sustained recovery unless the government can pass measures that can convince markets of its willingness to tackle India's fiscal and current account deficits,” said Jayant Manglik, president - retail distribution, Religare Securities.
4) Go in for currency swap
The Indian government can take dollars from a central bank outside India by swapping rupee at a lower interest rate on a temporary basis. This option has gained momentum and there are discussions of setting up lines of FX credit with other central banks, like what South Korea did in 2009. However, economists suggest it is far better to raise money through India's own initiatives.
The challenges of tapering by US Federal Reserve and the upside risks to oil prices arising from Middle East turmoil are likely to keep dollar-rupee on a strong footing in the immediate future. According to Standard Chartered Bank, the announcement of an FX swap facility with the RBI for public-sector oil companies may lead to sharp pullbacks in dollar-rupee and immediate consolidation, but they are unlikely to preclude a renewed uptrend if broad dollar strength persists.
5) Loan from IMF
According to CARE, a loan from IMF would be the last resort. However, India is not really in a desperate situation as in 1991. Also for a nation that is to be a global economic leader in the years to come, going to the IMF may not send the right signals to the world.
(Edited by Joby Puthuparampil Johnson)