The rupee’s relentless fall continued for most of last week touching new lows every passing day. On Thursday, it hit a new low of 65.56. Is it possible to infer some optimistic messages still?
Gloomy as the downward spiral of the Indian currency has been, there have been some developments which do give some hope that all is not lost.
One, the authorities appeared to be getting a handle on the problem at last. Specifically, the Reserve Bank of India’s attempts on August 20 to influence long-term interest rates through the bond market route are considered significant for many reasons.
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The hope might have been premature — the rupee’s free fall was not halted — but the RBI action does promise an increase in liquidity, and a softer interest rate regime at least over the medium-term. In that sense, the latest measures more than hint at a reversal of the monetary tightening introduced specifically on July 15 to curb volatility in the forex markets.
The RBI will buy long-dated government securities worth Rs.8,000 crore. This OMO (open market operation) route will infuse liquidity and push down bond yields which, in turn, will favourably impact bank lending rates.
The value of bank securities has been eroded seriously, and to address this problem the RBI will allow banks to spread the capital required over the rest of the financial year. While these would provide relief to the banks’ balance-sheets, the RBI’s hint that losses in the gilts portfolio may be largely recouped going forward is considered particularly significant as it suggests a general softening of interest rates. Although the markets ignored these positives, the implied change in RBI’s stance has been received well by banks, especially the government-owned ones.
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At a time India’s policy-makers are clutching at straws, the news that the rupee has some good company in its decline, can be considered a positive. Albeit in a cynical way, currencies of many emerging markets, the Malaysian Ringgit, the Indonesian Rupiah and the South African Rand — among others, have been battered along with the rupee. The common factor behind the decline — fears that the U.S. Federal Reserve would soon indicate the phase out of its stimulus programme.
Indeed, it is well known that the financial systems of many countries are held hostage by the U.S. monetary policy, which is primarily aimed at the U.S. economy. Ever since the Fed announced a possible tapering off — and this is conditional on the U.S. economy crossing some signposts such as reducing unemployment by a certain percentage — money managers throughout the world have been glued to what the Fed’s minutes will indicate.
Naturally, as was the case last week, there is plenty of speculation and exaggerated fears across the world. With the U.S. economy on a path to recovery, will the Fed withdraw the stimulus, perhaps as early as next month?
India seems to fare worse than some other emerging markets. Its dependence on short-term flows, which have started going back to the U.S., has exposed a big chink in its plan to finance the very large current account deficit ($90 billion) in an orderly way.
The Finance Minister, P. Chidambaram, succeeded, at least for now, in calming the market’s fears over the rupee and the larger problem of the CAD (current account deficit). This is a favourable development as the markets are beginning to take government statements seriously. The Finance Minister admitted that the economy was facing challenges on a number of fronts.
Gross domestic product (GDP) figures for the first quarter of the current year may be below par (but will pick up in the latter part of the year).
It is this welcome candour that might have made government communication effective this time.
Perhaps, the most positive development might be the decoupling of the stock markets from the forex markets. Until Thursday, the falling rupee was moving down in tandem with stock indices. But, on Thursday, the stock markets seemed to break loose from the clutches of the rupee as it were to post impressive gains which were carried into Friday.
Sceptics might say that a temporary rise which, given the economic fundamentals, cannot sustain. Whatever it is, policy-makers deserve a break no matter where it comes from.
narasimhan.crl@thehindu.co.in