Tag Archives: The Rupee has breached all predicted floors in the past few days and has been falling as a rock.

Rupee Doing a Bungee Jump – Time to bounce back?

 

The Rupee has breached all predicted floors in the past few days and has fallen like a rock.

It touched an all time low against the US dollar yesterday and traded at 68.78 loosing over 4% in a single day. The fall has been particularly sharp in this week as the rupee lost over 8% in just 3 days. Culprit in this case was the passage of Food Security Bill.

The Rupee was trading at 63.50 in 23 Aug (Friday) and with passing of Food Security Bill on Monday (26th Aug) sharply trended towards the 66 mark.

Food Security Bill (FSB) with all its right intentions of providing for the poor is not something the country can afford. The current account deficit has ballooned to over 4% of GDP and the FSB is estimated to cost 3.5% of GDP.

The looming elections in the coming year has got the ruling government to go after populist measures than trying to take some hard steps and get the economy back on track.

As I write this piece the Reserve Bank of India has come out and declared that it would be selling USD to Oil Corporations directly and this should provide some relief to the falling rupee. I would not be surprised that if the Rupee opens sharply higher and recovers all the losses of yesterday. But this relief rally would be short-lived as the fundamentals behind the fall have not changed. RBI’s step can reduce the volatility and demand in the Forex market but does not change the fact that the country does not have the money its spending.

On the flip side the fall of the Rupee might be a blessing in disguise for the economy. Exports from India become competitive and would bring in much-needed business to India. Where other countries like Japan have been deliberately trying to weaken their currency to improve exports India has this golden opportunity presented to it. Now does the government use it to the countries advantage or squander it away needs to be seen.

As an immediate measure my suggestion would be to launch a scheme to provide amnesty on bringing black money stashed abroad to India and investing them in Rupee denominated Bonds. The size of the black money in India is estimated to be 30% of the GDP as per World bank estimates. Of this 30% at least half is stashed overseas (some figures report higher numbers).

The Finance ministry could launch a scheme with 2 alternatives:

1. Bring in the black money tax-free for investing in non-interest bearing Rupee bonds. The money would be locked in for 3 years.

2. Bring in the black money by paying a 14% tax and investing in 5% interesting bearing Rupee denominated bonds.

With India’s Current Account deficit pegged at 4.9% of GDP and Black money overseas of at least 15% of GDP, this scheme could single-handedly support the falling Indian Rupee and bolster the Indian Government’s coffers. The instant demand for Rupee would push the currency up and bring in long-term capital to the country. Government could go a step ahead and allow the Bond Holders to borrow interest free against the Bonds if Investing Food or Energy Sector.

For the longer term, investments need to be made towards achieving food self-sufficiency and improving energy sector. The money collected through the amnesty scheme could be used to build storage facilities and investing in alternative sources of energy.