An unconventional way to save rupee

Tue, 9 Jul Pre-Open

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Rupee has been making new headlines every day. Open any newspaper these days and you are sure to witness a story on rupee debacle. In order to arrest further fall, the government has initiated various steps like curbing gold imports. However, the latest step taken by Reserve Bank of India (RBI) appears rather unconventional and weird.

Recently, RBI has informed treasury officials of banks to not give rupee forecasts to the market. RBI believes that this affects market sentiments. We know that rupee is being beaten black and blue at the moment and negative news can further impact the sentiments. However, we believe the recent move of not allowing bank's treasury officials to give forecasts reflects the inability of our central bank in controlling our currency market!

True that India's forex reserves are just under US$ 300 bn. This makes direct intervention in the forex markets not possible. But there are various ways to control rupee. Reducing bureaucracy (attracts investment), improving the investment climate in the country, raising rates on non-resident Indian (NRI) deposits are some ways to name a few. But our central bank chose to adopt a way that will restrict flow of information into the market. Often most information pieces eventually turn out to be noise. But curbing information flow is not the right way to operate in a free market, we believe.

It is true that rupee is under speculative attack right now. And any information that contains negative vibes can further hammer the currency. Hence, there is a need to curb speculation but not by restricting information flow. We know that Rupee is declining for structural reasons. Increasing gold demand, widening current account deficit (CAD) and withdrawal of QE by US are some of the reasons for current decline in rupee. Foreign institutional investors (FIIs) selling their rupee debt portfolio is another important reason for the current carnage in rupee market.

Thus, the government and RBI should focus on resolving these issues. Resolving problems with respect to CAD and gold imports is a long term solution. Improving investment climate will also help attract long term capital. Though some of these steps have already been taken, but a lot more needs to be done before their desired impact can be seen. Restricting bankers to give forecast may curb speculation to an extent but it will not help resurrect the rupee.