Three-step rupee rescue strategy

The government has decided to adopt a three-pronged strategy to stem the continued fall in the rupee. The game plan involves a more nuanced or faster intervention in the foreign exchange market, a possible NRI bond issue along with trade measures that include a cut in the import bill and a focus on six export sectors to jack up dollar income.

By Jayanta Roy Chowdhury
  • Published 11.09.18
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New Delhi: The government has decided to adopt a three-pronged strategy to stem the continued fall in the rupee. The game plan involves a more nuanced or faster intervention in the foreign exchange market, a possible NRI bond issue along with trade measures that include a cut in the import bill and a focus on six export sectors to jack up dollar income.

RBI intervention

Officials said North Block, during consultations,with the RBI, had asked the central banker to intervene in the foreign exchange market "in a more nuanced manner".

The two sides felt the trick was not to intervene aggressively, which have always proven to be costly, but rather in a specific manner at a faster speed. "The reaction time has to be quick and yet the intervention cannot be too heavy-handed."

The RBI sold foreign currency worth $13 billion in May-June alone to protect the rupee.

The rupee has fallen nearly 13 per cent against the dollar so far this year and has been the worst performing Asian currency. The fall had prompted the government to try and talk up the market and the RBI to intervene at least once quite aggressively. However, that had a limited impact.

A fear of contagion in emerging market currencies because of a massive fall in the value of the Turkish lira has seen most emerging market currencies, including the Chinese renminbi, the South African rand, the Brazilian rial and the Indonesian rupaiyah getting battered.

NRI bonds

Top officials had earlier told The Telegraph that an NRI bond may be considered as a way of shoring up foreign exchange reserves and helping to nudge the currency's value up. India had raised NRI bonds in 1998 and 2000.

In 2013, the RBI had raised foreign currency deposits through a subsidised scheme to shore up its reserves.

The fall not only makes India's energy imports costlier but it also means the country has to shell out more in repaying foreign currency short term debt. India's oil import bill is expected to go up by $25 billion, while the cost of servicing short-term borrowings will go up by $9.5 billion.

Import curbs

Officials said the third "axis" in the government's policy to protect itself from the global currency meltdown is to curb the import of the top items on India's list of purchases. The top six items on this list are crude and petroleum products, pearls, precious and semi-precious stones, gold, coal, telecom instruments and organic chemicals.

A weaker rupee makes imports expensive and exports cheaper in dollar terms. However, in India's case, the imports are either necessities such as crude and coal or influenced by cultural factors such as gold, but it is difficult to slash these shipments.

Nevertheless, customs duty changes and the Make In India initiative are expected to curb the import of items such as electronics and gold.

"We can cut some of our crude imports by taxing it more, but that just before an election would be highly unpopular and possibly not so effective," said officials.

Much of the precious and semi-precious stones imported are for re-export and, hence, are unlikely to be touched. Gold imports currently face an import duty of 10 per cent. Officials said while higher duties may not be slapped, suggestions of them being slashed are unlikely to be taken up now.

India imports two-thirds of its electronic needs. Industry association Assocham estimated last year that the demand for electronics hardware in India may rise to $400 billion by 2020.

Export facilitation measures will now be considered by the ministry of commerce, officials indicated. "In such times when outflow of hard currency has to be stopped and steps taken to encourage inflows, we will certainly be doing that," said officials.

The top six industries which have been benefitted by the fall in the value of the rupee are Infotech & BPO, Pharma, Agriculture, textiles including ready made garments, motor vehicles and auto components and leather.