New Delhi, Sept. 21: Faced with a strident demand by exporters to collar the surging rupee, North Block and the Reserve Bank of India (RBI) are expected to orchestrate efforts to drain cash from the economy.
The government is also expected to introduce measures that will encourage more foreign buyouts, using dollars held by Indian banks.
North Block officials said the RBI might also decide in favour of a token quarter percentage cut in interest rates to create a favourable market sentiment.
“Inflation (which currently rules at 3.32 per cent) is quite low. A rate cut would help industry and exporters and reduce the differential in the spread between Indian and European or US rates which, in turn, is attracting larger than usual NRI deposits.”
The economy is awash with cash because of the huge inflow of dollars. This, in turn, has seen the rupee escalate to a nine-year high. The rupee has strengthened to levels where it is trading at less than 40 to the dollar, after having nearly touched 50 to the dollar last year.
The RBI has injected rupees worth $43.1 billion in the nine months to July, almost three times the amount in the previous nine months. A bull run on the Mumbai stock market has attracted huge FII investments, while the booming economy is expected to attract up to $30 billion in foreign direct investment this year.
The central bank has the option of selling new long-term maturity bonds to banks to drain the excess cash in the system. This is expected to not only help reduce the pressure on the rupee but also put the lid on inflation.
“Although inflation rate is quite low at the moment, it is a fact that oil prices are rising at an alarming rate. There will certainly be a point in time when domestic prices will have to be allowed to rise too. The cash drain would help keep prices down by reducing demand,” officials said.
They said a rise in the cash reserve ratio — the traditional way of sucking cash out of the market — was not being favoured as this would “add to the borrowing cost and force banks to raise rates”.
Industry is already clamouring for cheaper loans from banks to spur investments and accelerate growth.
The country’s industrial growth slowed sharply to 7.1 per cent in July from 13.2 per cent in the same month a year ago. More worrying has been the fact that infrastructure growth has fallen to near 6 per cent.