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ECONOMY,
EXCHANGE RATE
Illusory
Fall
The
rupee is not the only currency falling against the US dollar. Most global
currencies are. India only has to take follow-up action without panicking.
By
V Shankar Aiyar
On
April 26, when the Government extended the tenure of RBI Governor Bimal
Jalan for two years, the forward rates (the rates for future sale or purchase
of a foreign currency) for the US dollar fell, implying expectations of
a stable rupee value. Such has been the reputation of Jalan a.k.a. Mr
Rupee. Not without reason. After all, in the 30 months since he became
RBI governor, the rupee had slid by just 6 per cent on an annualised basis-from
Rs 37.9 to Rs 43.6 a dollar-while foreign exchange reserves had swelled
from $25.9 billion to $35 billion.
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DOLLAR
IN, DOLLAR OUT
|
1999-2000
Exports:
$30
billion
Imports: $47 billion
Trade deficit $17 billion
Loan repayments $11 billion
Total shortfall of dollars $28 billion
The shortfall was funded through:
Software exports: $4 billion
Remittances: $12 billion
Official assistance: $3 billion
Total: $19 billion
But there was still a gap of $9 billion
This was met through inflows of:
External commercial borrowings: $3 bn
Foreign direct investment: $2 billion
Portfolio money (FII & VC funds): $3 bn
NRI deposits: $2 billion
India thus had a surplus of $1 billion |
2000-2001
Projected
Exports: $35.5 billion
Projected
imports: $ 57 billion
Projected trade deficit: $21.5 billion
Likely loan repayment $12 billion
Expected dollars shortfall: $33.5 billion
Which could be funded through:
Software exports: $5.5 billion
Remittances: $13 billion
Official assistance: $ 3 billion
Total: $21.5 billion
The gap could still be $12 billion
This is expected to be funded by:
ECB: Unlikely to be much this year
FDI: Sluggish inflows so far
Portfolio money: $297 billion till date
NRI deposits: Expected to be $2 billion
Unless inflows rise, rupee will be weak |
That was
till April 2000. Since then both Mr Rupee and the Indian currency have
had a torrid time. By August 16, the rupee had slipped to 45.90 a dollar-a
value erosion of almost 5 per cent in less than five months. That triggered
a panic most experts feel is uncalled for. Says Ramu Deora, former president
of the Federation of Indian Export Organisations: "Every currency
has fluctuations but only in India does it trigger a comment from top
to bottom."
The RBI's
main worry is not the slide in the rupee per se. "We are worried
that headline hysteria may trigger expectations completely out of line
with fundamentals-leading to their fulfilment," says a senior RBI
official. In just three weeks since July 21, the RBI has hiked the bank
rate (the rate at which it gives short-term loans to banks) by one percentage
point, raised the cash reserve ratio, asked corporates to bring back foreign
currency kept abroad and directed exporters to slash their foreign currency
holdings by half. It has also tried to talk the rupee up by stating that
the foreign exchange reserves were adequate, ruling out any cause for
alarm.
But there
is only so much that the RBI can do. After all, every major currency in
the world, barring the Japanese yen, has depreciated against the US dollar
in the past year. In most cases the depreciation has been higher than
the fall in the rupee value. The French franc and German mark have depreciated
by 14 per cent, while the British pound has fallen by over 6 per cent
against the US dollar. Since the rupee has fallen by only 5 per cent in
the past one year, it has actually appreciated against all global currencies-barring
the dollar and the yen. The strengthening of the US dollar is a reflection
of the continuing solid performance of the US economy which has forced
the US Federal Reserve Bank to hike interest rates from 4.75 per cent
in June 1999 to 6.5 per cent. Higher interest rates in the US make investments
in India less lucrative, impairing inflows into the country.
more...The
Gloom Could Get Gloomier
Top
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The
Government should target inflation and leave the exchange rate to the
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Editor V. Shankar Aiyar in 
