Last Friday, the government announced five measures to arrest the sharp slide in rupee and also the deficit in the current account. These include relaxations in investment limits for foreign portfolio investors in the corporate debt market to attract dollars and exemption from withholding tax to companies raising funds through rupee-denominated bonds abroad. The government also indicated curbs on non-essential imports and said measures to boost exports will follow, both aimed at containing the current account deficit. The next day, Finance Minister Arun Jaitley provided assurance the government will be able to meet its revenue collection target as well as the fiscal deficit target set in the Budget for 2018-19 at 3.3 per cent of the GDP.
In calendar year 2018, the rupee has depreciated by almost 13 per cent, which is seen by the government as too fast-paced a slide. It would have the rupee to fall about 4 per cent a year. The Reserve Bank of India may not necessarily share this view for good reasons. The REER, or real effective exchange rate, based on 36-currency export and trade based weights, of the rupee for August 2018 stood at 114.54, suggesting the rupee is intrinsically overvalued, and is depreciating only against the US dollar. The panic may thus be uncalled for. The concerns over current account deficit going out of control are valid, but the measures taken are unlikely to attract dollar inflows immediately, and also have been perceived as little to influence the markets. The markets expected the government to announce a foreign currency non-resident bank deposits, or an exclusive window for oil marketing companies to buy dollars from the RBI instead of knocking on the doors of banks. The government would do well to realise that easing capital controls should be part of a larger reform agenda, rather than a reaction to a crisis. India’s experience and academic research show that efforts to manage the trilemma — free capital mobility, rigid exchange rate and monetary policy autonomy — is not possible.
A misconceived notion in some parts of the government is that speculators are playing truant and short-selling the rupee. The so-called speculators are mostly Indian exporters and importers taking positions on the rupee based on the clues they receive from the market. While senior finance ministry officials have been making statements — irresponsible at times — on the value of rupee, the RBI has desisted from giving any firm signal to the market about where it would draw a line. This suggests lack of coordination between the government and the regulators despite existing forums such as the Financial Stability and Development Council.