As the rupee continued to hover around its record low, the government and the Reserve Bank of India (RBI) announced a raft of measures to arrest the slide including the easing of investment caps for foreign investors in a range of sectors and tightening liquidity by making funds costlier for banks.
In the latest set of moves, the government has hiked the import duty on gold to make you bear the cost of a creaking foreign exchange deficit and stabilise a weakening rupee.
India is also set to float a first-of-its-kind proxy sovereign bonds that will allow State-owned companies to dig deep into the pockets of foreign pension and institutional funds to stem the rupee’s slide, raise funds for building highways and also test international investors’ confidence in the economy, which has been the target of unsparing criticism of global credit rating firms.
These, along with other actions such as easier overseas borrowing norms and more attractive returns on NRI deposits in Ind-ian banks, is estimated to fetch the government an additional $11 billion (about Rs 66,000 crore), crucial to strengthen the rupee that has fallen by more than 15% since May.
The measures are part of a strategy to rein in India’s current account deficit (CAD) —the difference between dollar inflows and outflows — to about 3.7% of GDP from a record 4.8% of GDP last year.
Amid moves to shore up its dollar stash, the government should not lose sight of the more lasting solutions. Some analysts have categorised the recent spate of moves as quick-fix solutions.
This argument has some merit, although stop-gap measures are sometimes the only prescription given the degree of exigency. The math is based on the idea that additional dollar inflow will enable the government without dipping into its $285 billion of foreign exchange reserves, which is just about enough to cover imports for seven months.
In a slowing economy, however, the assessment of incremental capital inflows can sometimes prove to be an overestimation.
India’s factory output fell by 2.2 % in June, the second monthly decrease in as many months, underlining the fact that the country is stuck with the toxic combination of low growth and high inflation. This broadly mirrors what shop-end evidence is showing.
People are putting off purchases of cars and televisions, prompting firms to defer capacity expansion. As a corollary, this will moderate India’s private debt inflow slowing down dollar inflows.
Besides, foreign investors continued to pull out from emerging markets, including India, after the US Federal Reserve signalled a timeline to wind down its monetary stimulus programme by mid-2014.
In the final analysis, the rupee’s fall is a symptom of a bigger structural problem — the CAD — that will require stronger, immediate and consistent policy responses.