Weak Rupee policy of the RBI

Back in Jan 08, India’s forex reserves were about $220B, the INR USD Exchange rate was Rs.39 to the greenabck and oil was trading at $100 a barrel. None of the countries were particularly perturbed over the high price of oil let alone India. The Reserve Bank of India(RBI) kept on propping up the Dollar by buying dollars in the open market even as the weakness of the dollar made it more attractive to buy. Exports were surging at around 22%, and no one other than the exporters including the IT exports lobby complained. Fiscal deficit was precariously high, though inflation was more under control at around the 4% mark.

Cut to June 08. Inflation has shot up to over 11% more due to global factors beyond the Govt’s control, and is expected to remain so for some time to come. This has forced the RBI to increase interest rates to beyond the tipping point where economic slowdown is imminent. An economic slowdown will lead to lower tax collections, widening the already dangerously high fiscal deficit. And profligate loan meals like the ones announced by Madame Sonia Antonio Maiyo, which will put a further strain of $ 15B on the already stretched Govt Rupee, don’t make matters easier. With global economic slowdown comingfast and furious, exports are bound to be affected, though some people still argue that such an slowdown is actually beneficial to the IT Outsourcing business, which I very much doubt.

However, the most interesting happening in all this melee is, the RBI continues to buy the Dollar even after the Rupee has fallen to more than Rs.43 to the Dollar!! Today, the forex reserves stand at about $305B … which means that while Rupee fell all the way from Rs 39 to Rs.43 ( about 10%) , the RBI has continued to mop up Dollars in the market, further helping the weak Rupee policy, a major beneficiary which is the exports lobby, including the IT captains.

But what perhaps no one realizes is the following. Even in Jan 08, and right through in the apst, India has always been a nett importer, meaning imports have been much higher than exports, unlike, say, China, where the exports have outstripped imports significantly, creating records rates of Trade surplus. Oil has been the single biggest item in India’s import list. With ONGC and the private sector boys failing to meet even 65% of India’s burgeoning oil requirements, we had no other choice. But in this 6 month period, a lot of oil has flown in various petro pipes. Oil has shot up to $145 now ( 45% increase). This, coupled with the 10% drop in the Rupee value , has bloated the oil import bill by at least 55% for us !!

Granted that we perhaps could have done nothing to control the $45 per barrel in crude prices, but all the RBI could have done is to liquidate a big portion of the $95B dollar holdings that they accumulated over the past months, to put a lid on the free fall of the rupee. That could have controlled our oil import bill by at least 10% … clearly the RBI seems to have switched over from a strong Rupee policy that it has has been holding over the past 3 years to a consistently weak Dollar policy. And I suspect the Exports lobby and perhaps the NRI lobby are behind this move, since they were the ones crying foul all these momths when the Rupee appreciated…

Maybe the RBI is hoping that those NRIs who were so eager to jump into the growth bandwagon of India will now find it more attractive with a weaker rupee, and use this opportunity to pour their hard earned monies back into mother India’s “growth engine”.
If that indeed is their thinking, then I am sorry to say that they are totally mistaken. NRI inflow is of 3 types – those whose families are dependent on their remittances for day to day sustenance ( mostly from the Gulf, and this continues to be the single biggest chunk), those who want to “give back something” to their motherland , for emotional reasons deciding to remit either for the purposes of charity or for business , which I suspect is only a minority, and the third, who typically invest in any place where it makes business sense ( and if they are NRIs, they may favour India, to the the comfort factor, as long as business prospects are conducive).

There may not be much change in categories 1 and 2, but no businessman is stupid enough to pump his money into something being touted as a great growth story, if it does not make business sense.

Interest rates shooting through the roof to around 13% now ( base rate, excluding the real cost of capital computation)
Fiscal deficit going out of control, with irresponsible loan melas and similar non plan expenditure increase, and high oil prices.
Economic slowdown being imminent, with all sectors likely to see a slowdown ( agriculture continues to be in the hands of God… He willing, we may see good monsoon yet again and Argi sector may well hold up).
Inflation over 10% consistently may mean the real worth of any earning will be significantly eroded quickly.
Continued fall in Rupee vis a via the Dollar, may make it less attractive currency to invest, in terms of dollar returns.

I don’t know of many businessmen who are brave or foolhardy to say” well, India is a long term growth story, let me continue to invest in it notwithstanding all the above short term effects”. Forget investment in business, even stock markets are witnessing flight of capital for the past 3 months consistently (to be fair, not just in India but across all developing countries), as part of the global stock market meltdown.

But then, who cares? With polls round the corner, the ruling parties may want the powerful exports lobby to fund election expenses, and therefore are perhaps trying to pander to them. It does not matter that the common man is paying a higher price for petrol by about Rs5 now…. The Govt and RBI could perhaps have averted this increase, but elections come right on top, above the common man or the country…

Long live our politicians!!!