To cut down short-term volatility, however, that would sufce.This allied with options a) and b) would be the RBI’s arsenal.Options c) and especially d) could, however, becomenecessary i the fscal conditions – namely the balance opayments – worsen. India ran a current account defcit o 4.8%in FY13 and estimates or FY14 are 4.3% to 4.5 %. This meansan uncovered liability o $83 billion to fll up through portolioand direct investment, besides remittances. Worries on Indianot pushing growth enough to earn the money to fnance thisgap has piled on top o money seeping out rom emergingmarket economies to pull the rupee down.Raising interest rates is expected to make debt ows strongeras the dierential with rates obtaining in developed marketswidens. But the higher rates could make equity ows weaker.Lower interest rates mostly signal an economy with bettergrowth possibilities and, so, robust equity markets.The options or sovereign bond are unlikely to be usedimmediately as it will be rated and this will set a ceiling orsub-national entities. A public sector bank-led eort to mopup some unds rom abroad is the more likely alternative, i at all.
Trends in Indian monetary management
The current tensions in the rupee market have emergedprincipally rom the rising share o oreign trade in India’sGDP. It is more than 40% o the GDP o $1.8 trillion.The Indian banking system has been slow to adapt to therequirement o this market, principally the need to hedgecurrency bets. The RBI has run a generally closed marketthat ocused only on providing trade credits and discountingo bills o exchange. It had not actored in the need or acurrency hedge.So, in 2000, the onshore currency market with only theUSD-INR and Euro-INR pair available did business o just$2.7 billion. As trade diversifed, importers and exportersconsequently moved abroad to fnd ways to cover their risks.The non-deliverable orwards (NDF) market in the rupeesprang up where the underlying was the quote or the rupeein the NSE, but the trades were squared o in US dollars. Themarket developed in Singapore and then Dubai too joinedthe party.Also, in 2007, the government imposed a securitiestransaction tax on the local market that pushed volumesabroad by the shovel-load. By the time the domestic banksmoved in to take positions in the currency, the action hadshited abroad. In June 2013, or instance, the total size othe daily onshore currency market was about $40 billion.But Singapore itsel does business o close to $25 billionin the rupee NDF market.The 24-hour currency trading cycle is putting pressure onmanaging the rupee by the RBI. Intererence in the exchangerates runs the risk o importing ination and worsening thefscal defcit.The RBI has in the past tried options, including setting upquasi-sovereign banking bases abroad, to guide movementsin NDF but those have not delivered.This brings us back to the connection between the rupee andthe behaviour o the economy.There are two lines o argument or the RBI to grapple with.A all in the value o the rupee, some are convinced, will help.A weaker rupee will help services sectors like IT. An earlyindication o this was Inosys’ results. It released earnings inline with orecasts, the frst time ater several quarters, buoyedby a 9% dip in the rupee since June 2013. All such frms earnin orex and pay in rupees.In the manuacturing sector, too, the rupee can help. Acheaper currency means Indian goods will be cheaper abroad.This is signifcant as India has aced competition rom Chinain this sector due to the labour cost advantage that the latterenjoys. A sustained dip in the rupee o this magnitude canbe a game-changer or Indian actories. I entrepreneurs areconvinced that the rupee will stay thereabouts with the costadvantage vis-a-vis other Asian economies, it can change theace o Indian manuacturing and create jobs. But the key hereis to ensure that capital-labour productivity should not dip o.For the government, this helps instead o oering costly taxset-os to myriad sectors. Budget FY14 projects total directtax revenue oregone on this head as Rs 1,13,471 crore orabout 9% o total tax receipts.But on the way there are short-term pains. The elections aregetting closer and these pains can be expensive.