Rupee fall has forex reserves plunging $16.5 bn since April

Mumbai: RBI's fight to prop the tottering rupee has contributed substantially to forex reserves dipping by a hefty USD 16.554 billion or 6 percent to a low of USD 275.49 billion since the beginning of this fiscal.

According to marketmen, a large part of this has been used to save the bleeding rupee, which went on a downward spiral after May 22 when Ben Bernanke of the US Fed had hinted at turning his easy money policy much earlier than previously hinted.

According to the latest Reserve Bank data, forex reserves plunged to USD 275.491 billion to the week ending August 30, which is a near 6 percent fall from USD 292.646 billion as of March 29.

The rupee opened the fiscal at 54.25 to the US dollar but fell to a life-time low of 68.86 on August 28, losing nearly a third of its value. However, since the new RBI Governor Raghuram Govind Rajan took over the affairs of the Mint Street on September 4, the rupee has been on a winning streak, and closed the last trade on Friday at 65.24 to the dollar.

On a weekly basis, the reserves dropped by USD 2.2 billion as of August 30, marking a three-year low, the RBI data showed.

Overall, the foreign currency assets have fallen more to the tune of USD 3.08 billion to USD 247.40 billion in the week ended August 30.

The Reserve Bank was net seller of the dollar twice this year in May and June, according to its monthly data.

In June this year, RBI sold USD 2.252 billion net of the US currency, while in May it sold USD 107 million dollars.

Looking at the steep fall in the overall numbers, marketmen said, it could be surmised that the central bank has intervened in a much more heavier and frequent manner in the forex market in July and August, as these two months saw the rupee plunging to new lows.

According to forex dealers, RBI not only intervened in May and June, but was present in the market all through July and August when rupee was touching new lows.

The rupee has been in free-fall territory since May 22 when the US Federal Reserve said it would slow and finally taper of its monthly USD 85 billion buyback of government debt or withdraw its easy money policy called quantitative easing.

The announcement led to a massive selling by the overseas investors in the country's debt and equity markets, to the tune of nearly USD 15 billion, mostly from the debt market.

To save the rupee, the central bank had announced various liquidity tightening measures starting July 15, including steeply hiking call money rates and partly bringing back capital control.

PM-speak on rupee tumble does not have enough currency

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One area where policymakers have failed in recent years is their inability in continuing to attract long-term capital.

September 1, 2013:  

As Prime Minister Manmohan Singh embarks on an overseas visit this week to attend the G-20 Saint Petersburg Summit, he may pray and hope that the likely US action on Syria will delay the tapering of US stimulus.

The hope being that developments on Syria may prompt the US Federal Reserve to think twice about tapering in September.

For this past month, when rupee hit a record low against the dollar, Indian policy makers have tended to lay the blame for the fall in rupee on “external factors” such as the May 22 announcement of likely US stimulus tapering.

Seldom had one seen Indian policymakers and political leaders take ownership for their policy goof ups or for that matter even their policy inactions.

In this backdrop, the Prime Minister’s recent statement in Parliament on the rupee slide was seen more in the nature of excuses given by a failed student.

It was quite perplexing to note that he went the extra mile to remind the developed countries – in pursuing their fiscal and monetary policies – that they should take into account the repercussions on emerging economies.

What about India’s own domestic policy failings that had led to the current situation? ask experts from the international policy community.

This is even as they took comfort from the Prime Minister’s reassurance to the international community on his commitment to reforms and restraint from capital controls.

One area where policymakers have failed in recent years, is their inability in continuing to attract long-term capital.

India has been relying on short-term capital flows to fund its deficits.

After sleeping on the wheel for nearly four years, the UPA Government is now, in the last year of its term, pushing for several reforms that may not be fiscally prudent.

The Food Security Bill has political engineering all over it, say economy watchers. The Food Security Bill is another way of distorting prices, mis-allocating resources and adding to the fiscal burden in the longer term, says Peter Drysdale, a Professor of Economics at Australian National University.

“India’s progress through reforms has been impressive in the last two decades. But this (Food Security Bill) sends a wrong signal to the reform process.

“This and recent hardening of approach to FDI signals that a caution is needed about India’s deep commitment to the reform process.”

Lack of confidence in policy commitment is the main reason for the short-term shock now experienced by India. Any wise Government should recognise this, says Drysdale.

Fiscal discipline, commitment to openness on capital and commitment to leaving the exchange rate do its proper job are the need of the hour.

It’s not clear that the latter commitment is being taken seriously. Defending the currency may not be a right approach or a long-term solution.