The inflation rate in India was close to double-digit for much of the past five years. The rupee lost purchasing power domestically. Hence its external value was expected to depreciate accordingly.
The fall was much steeper than expected, due to the global dollar surge, caused by the U.S. Federal Reserve’s announcement that it would gradually end its bond purchases.
We may take some solace in the fact that the rupee’s decline is commensurate with the fall of currencies of other countries like South Africa, Turkey, Brazil and Indonesia. But there is an urgent need to ensure it does not overshoot, and to stabilise it around a fair value.
The first option is to offer swap facility to oil companies, who are large dollar buyers. The RBI has done well in giving them direct access, so that they bypass the spot market; thereby taking some pressure off. In a panic situation even thin trading can cause the rupee to fall steeply.
The second option concerns China. India’s biggest trading partner, China alone accounts for half of the non-oil trade deficit. This bilateral deficit can be offset by capital inflows from China into India’s infrastructure, such as metro or road projects. Such sovereign investment is already forthcoming from Japan, Singapore and the UAE.
The third option is to increase import of oil from Iran, which accepts total payment in rupees.
The fourth option is to sell a gold bond with a five-year maturity, which is an exact gold substitute. This can be sold just like Kisan Vikas Patras, and redeemed for physical gold at the end of the tenure. If successful then longer tenure gold bonds should be introduced.
The fifth is to provide a strong push to exports by widening the focus market and focus product scheme. Iron ore export earning can be restored to more than $10 billion annually.
The large current account deficit was also caused by import of coal (about $15 billion). Surely that can be brought down to zero very quickly, especially since India’s has the world’s third largest coal reserves.
Finally, there is an urgent need to revive manufacturing growth, which has been nearly zero for the past two years. The necessary actions have already been outlined in the National Manufacturing Policy. It would help to have a benign interest rate regime.
(As told to Lalatendu Mishra)