New Delhi, Aug. 21: Top finance ministry officials are privately admitting that the import duty hikes and liquidity measures taken to calm the forex markets may not yield the desired result.
Around $14 billion has been pulled out by overseas investors since March this year, lowering the forex reserves to $278.67 billion as on August 9 from $292.65 billion in March this year.
The free fall of the rupee and the capital control measures announced by the RBI are expected to scare away more short-term investors from the domestic market.
Officials said a strong measure would be to offer NRI bonds through PSU banks.
“We had calculated that banks can mop up $1 billion by offering up to 1 per cent more on foreign currency NRI deposits. Bankers tell us the figure could go up to $1.5 billion. But that may be the maximum. If we need more, an NRI bond offering 7-8 per cent return is the answer. However such a move is costly for the banks and that is why we are hesitant from giving the medicine the forex markets seem to be asking for,” said economists at North Block.
In 1999 and 2001, the rupee was propped up through bond issues by the SBI. However, this move is being opposed by the SBI, which is trying to strengthen its balance sheet, affected by rising bad loans.
The markets are not willing to accept the North Block’s calculations suggesting that India may end the year with $5 billion extra in its forex reserves.
Deutsche Bank in a note today said the rupee might touch the 70-mark against the dollar within a month. Punters in rupee futures in Dubai, Singapore and London also seem to agree, according to market sources.
A chief forex dealer with a state-run bank in Mumbai said unless US Treasury yields start reducing, “there is little respite for the rupee… this fall will continue as will the mayhem on the BSE and in the Indian bond markets”.
“Forex markets see the measures announced by the North Block (import tax hikes, PSU firms borrowing money and NRI deposit rates being raised) as too little, too late. They also add to the rupee woes the political uncertainity and feel the rupee is bound to continue falling,” the dealer added.
Internal notes prepared by foreign exchange brokerages speculate that the currency crisis, which could fuel another bout of inflation in India by raising oil prices, could result in the general elections, which are scheduled for early next year, being brought forward.
“All this means they (foreign speculators in Indian currency) add political risks to their perception of a weakening rupee and are betting that the rupee will fall to lower levels,” said finance ministry officials.
Singapore bank DBS today said the latest RBI move to ease liquidity should not be construed as a drawback of its tightening stance, but as a measure to keep the government’s borrowing cost under check and give succour to banks.