Editorial: Anyone here for the Rs?

It is not clear whether the current policy of tightening liquidity to save the rupee is largely RBI's brainchild—chief economic advisor Raghuram Rajan has said the government welcomes RBI's statement—but it appears to have worsened matters, at least the day the central bank came out with its monetary policy. If the objective of the liquidity tightening was to stabilise the level of the rupee—something RBI denies—then it failed since, with the rupee closing at 60.49 to the dollar on Tuesday, it is worse than the 59.9 it was the night of July 15 when RBI decided to start tightening liquidity. If the idea was to target, and lower volatility as RBI says it is, this didn't quite work either since the rupee dropped 107 paise to the dollar on Tuesday, a level of volatility not seen in the last few years if you exclude the 106 paise fall on June 26. Interestingly, such volatility will also drive away FII flows since the loss on the value of the currency will be perceived to be greater than potential gains. While it is possible to argue the rupee will correct itself on Wednesday as market-men misread RBI's signalling on Tuesday, the larger problem is with RBI's actions. By clamping down on the futures market in currencies, and making the market thinner by the day, in principle volatility is going to increase—ironically, that increases the chances of the current tight monetary policy continuing for a longer period of time.

Nor is it clear why RBI Governor D Subbarao said he was not in favour of either a sovereign bond or that India didn't need to go to the IMF when it is obvious India has a problem funding $20-25 billion of likely FY14 CAD—in any case, the government has kept the market in suspense by saying all options are open. By the same token, when a high CAD was being run for years, it is not clear why the government never raised funds overseas since the rates would have been attractive then—nor was there any suggestion by it that RBI buy more dollars when the rupee was strong, indeed excessively so.

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