Assocham asks RBI to set up rolling fund for Rs. stability
The Reserve Bank of India should consider setting up a rolling fund for trading in foreign exchange or allow Indian firms to issue dollar-denominated shares to avoid rupee fluctuations, industry body Assocham said today.business Updated: Aug 21, 2012 19:29 IST
The Reserve Bank of India should consider setting up a rolling fund for trading in foreign exchange or allow Indian firms to issue dollar-denominated shares to avoid rupee fluctuations, industry body Assocham said on Tuesday.
According to a study done by the chamber, there is a strong co-relation between foreign institutional investors (FIIs) outflows and the movement of rupee exchange rate.
"This is emerging to be the immediate cause of the increasing frequency of oscillation in the exchange rate," the study on 'Financial sector instability following global crises' said.
It said whenever an economic crisis hits the rupee and the rate depreciates, it remains at the lower level rather than comes back to the pre-crisis level.
The next crisis pushes the rate to another low. Thus, there is a "ratchet effect".
There has been a partial exception only after the 2008 crisis when the rupee had partly recovered lost position, it added.
For averting this situation, the study recommends that "The Reserve Bank of India should have a small rolling fund earmarked for trading in foreign exchange, synchronised with the entry and exit of the FIIs".
Also, it said, RBI should buy dollar or other hard currencies from the market when FIIs are coming in and sell when they are exiting. This should cushion the rupee.
Alternatively, a specific market for FIIs where dollar denominated scrip of Indian companies could be traded can be considered, it said.
"To the extent FII holding is allowed in Indian companies, we allow Indian companies to issue dollar denominated shares. These will, of course, have some equivalence with prices of the same shares in stock markets through the prevailing exchange rate," the study said.
It said such a system will obviate the need for FIIs to convert their investible funds into rupee every time they want to invest and reconvert every time they want to exit.
"Such an alternative exchange could become an offshore trading bourse and help India emerge as an international financial centre," it said.
Over the last one year, the rupee value has depreciated by almost 25% having a severe adverse impact on the Indian economy, which is driven significantly by imports, it said.