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Rupee’s circle of reason

business Updated: Dec 04, 2013 02:33 IST
Gaurav Choudhury
Gaurav Choudhury
Hindustan Times
indian rupees

The Indian rupee has swung between two extremes over the last six months. Its value against the dollar during this period broadly resembles the shape of a V, with steep fall for the first four months followed by a gradual climb during the later part of the curve.

Having cantered close `70 to a dollar, the rupee has recovered significant lost ground, partly because of a string of measures by domestic monetary and fiscal authorities, and partly aided by the return of a more benign international environment. Money in a maze

Over the past four months that the government and the Reserve Bank of India (RBI) have launched a string of steps to attract foreign capital to contain the current account deficit (CAD) — the gap between dollar inflows and outflows — that plunged to 1.2% of GDP of $5.2 billion for the July September quarter from 4.9% of GDP or $21.8 billion in the previous quarter.

The measures include: import curbs on gold, foreign exchange controls for companies and individuals and easier investment norms for a host of sectors such as telecom and high-tech defence. It had also opened a special window for dollars for oil companies that has helped reduced the daily dollar demand in the spot market by about $500 million.

The window has since closed with the RBI announcing on Monday that oil companies have returned to the normal foreign exchange market for their daily dollar requirements amid signs of stability returning to the currency markets.

In May and June, there was heightened speculation that the US central bank will start unwinding its stimulus programme, which will push up interest rates at US banks.

This triggered a rapid exit of foreign funds from countries such as India.

Between June and August, foreign institutional investors (FIIs) pulled out more than `23,000 crore from Indian stocks driven by the fear of an imminent scale-back of an easy loan policy in the US.

There has, however, been a dramatic turnaround since September after the US Fed deferred a tapering. Foreign institutional investors (FIIs) have brought in dollars worth more than `25,000 crore into Indian equities since September.

The resultant supply of dollars has helped stem the domestic currency’s slide.

In macro-economics, the twin deficits — current account deficit (CAD) and the fiscal deficit — are of paramount importance.

If no action is taken, India has to either earn about $70-$80 billion every year through the capital account or meet the deficit by depleting our foreign exchange reserves. Clearly, both the options are not realistic. So far, India has been able to finance its CAD without drawing on the $280-odd billion of foreign exchange reserves.

The gap has tapered down in the last quarter aided by a sharp slump in gold imports and a smart rebound in exports amid early signs of recovery in the US and Europe that have boosted shipment orders.

India has targetted to limit CAD to 3.7% of GDP or about $70 billion this year, down from $88 billion last year.

Fiscal deficit — shorthand for the amount of money that the government borrows to fund its expenses, however, remains a key worry with the finance ministry committed not to cross the “red line” of 4.8% of GDP this year.