Money market professionals routinely describe exchange rates in terms of ‘resistance levels’ or ‘psychological barriers’. Exchange rates are often said to resist movement towards some rounded number such as Rs. 60 to a dollar, 100 yen to a dollar or Rs. 100 to a pound.
It sometimes appears that exchange rate movements accelerate once these barriers are crossed. Mainstream academic economics, however, dismiss the phenomenon as a mere speculative prospect.
Having crossed 61 to a dollar, the debate now is veering around the next psychological barrier — a scary 65. More than the number, it’s the rupee’s sharp and unhindered slide that is causing unease. If the country’s top economy and currency administrators have gone into a huddle in recent days, it is only symptomatic of the anxiety gripping India’s macroeconomic managers.
There’s still a lot the RBI and the government can do. To begin with, there is the prodigal son. It’s not love alone for the old homestead that he sent across more than a staggering $70 billion last year. India can still offer the best return on investment to its diaspora and there’s no reason why this fact should escape the attention of the mason in Muscat or the doctor in Devon.
As long as they have something to save, it makes sense for them to remit it back home. This, thus, could well be an apt time to float a first-of-its-kind proxy sovereign bond that will allow the government to dig deep into the pockets of non-resident Indians (NRIs) and foreign pension and institutional funds to stem the rupee’s slide and also test international investors’ confidence in a slowing economy.
The bond can come with a guaranteed return of say about 9%, and can be structured as a long-term sovereign debt instrument. The Resurgent India Bond (RIB) 1998 and the India Millennium Deposit (IMD) 2000 were also similar bonds targeted at channelising NRI savings into India, but were of a much shorter tenure of five years.
The RBI can also pick from a vast array of other instruments. Moral suasion or asking banks, not by decree but by a non-official nudge, is one tool that central banks widely use to prop up domestic currencies.
India’s banks can be asked to raise relatively low-cost overseas funds and lend them in rupees here to enhance the greenback’s supply.
Staggering import dollar payments for a short-period is another method. In both equity and currency markets, time is of critical essence. If immediate steps are not taken, there aren’t much externally that can prevent the rupee, which only two years ago joined the elite club of symbol-endowed national currencies, from plunging to new lows.
Moves such as the RBI’s intermittent selling of dollars through state-owned banks, will, at best, work as a temporary balm.