No more tinkering
- LIVE: Election Commission announces Lok Sabha election dates
- Sheila Dikshit appointed Kerala Governor; Congress-RJD pact likely today
- You told us go to hell, says Supreme Court, sends Subrata Roy to jail
- For âcheeringâ Pakistan in India match, university in Meerut suspends 67 Kashmiri students
- Attacker, victim: 2 faces of Gujarat riots come together for âHindu-Muslimâ unity
To address the rupee's slide, government must actively smooth the path for foreign investment
The rupee has seen a sharp decline in June. There are various options for addressing this slide in the short, medium and long terms. Some of these, such as financial sector regulatory reform, are easier to operationalise than others.
The immediate solution is for the RBI to intervene. If the RBI intervenes in small doses, it would have little impact. So, the RBI could step in, in a big way. Some estimates suggest that the size of the foreign exchange market for the INR/ USD is about USD 70 billion per day. Let us say the RBI sells 10 per cent of that, or USD 7 billion a day, to have an impact on the market. It could do this for a few days, and try to prop up the rupee. If the rupee stabilises in the first few days, the RBI could stop. If, instead, it leads to a speculative attack, as is likely, the RBI could try for about 10 days and call a halt after having lost USD 70 billion. This must, of course, be sanctioned by the government, or the RBI could end up looking foolish. The government and the RBI do not appear inclined to take this route. The second option is to raise interest rates. This would attract NRI deposits and remittances, in addition to debt capital. The government and the RBI do not appear to be amenable to exploring this option either, especially in light of the growth slowdown. By all accounts, they might float a scheme for NRIs or raise some dollars through sovereign bonds, but they may not raise the policy rate for an economy-wide effect. The effect will, therefore, be limited.