Economic Highlights
New Delhi, 11 July
2022
RBI’s Rupee Plan
KNEE JERK REACTION
By Shivaji Sarkar
The Reserve Bank of
India engages in knee jerk reactions to arrest the decline of the rupee against
the dollar. It is doing so by boosting foreign exchange inflows amid growing
current account deficit and simmering inflation, a difficult prescription.
If it’s any
consolation, even the British pound is on a two-year low against the dollar and
is not expected to do better amid pressure from a mix of domestic and global
concerns. The sterling pound fell to $1.87, a drop of about 12 per cent as
Britain passes through a political crisis with the resignation of Prime
Minister Boris Johnson.
The RBI is faced with
a critical task of managing the domestic inflation accentuated by the global
price rises, using the dollar management, largely through its selling and
losing $40 billion reserves in the last nine months. It is accentuated by $30
billion worth of withdrawal by foreign funds in past nine months. The concerns
have increased as trade deficit shot up to $25.64 billion in June, a record,
due to rising import bill for oil and coal. It leads to the highest current
account deficit since 2013 of about 3 per cent of GDP.
The RBI is managing
the situation through doubling annual overseas borrowing limits for corporate
to $1.5 billion and temporarily abolishing interest caps for banks to attract
deposits from non-resident Indians (NRIs). This means that till now the
external borrowings were largely dealt by the government, now this is being
extended to wider arena. India could face the 2008 global Lehman meltdown
because of the resilience of parallel systems. Many other resilience of the
society eroded with the note-ban. The present situation has the potential of
emerging into a deep debt situation beyond the government or official level.
This may put the rupee
under further stress. It has depreciated by 6 per cent against the dollar so
far and with heavy portfolio outflows and tightening post-Ukrainian war the
situation may be on a razor’s edge. Prices were rising even before the war
broke out. Now the increasing trade gap in June, because of rising imports of
crude gold and commodities, has added to the burden. The trade gap is expected
to double this year to 3 per cent of the GDP. This means the larger imports are
to devour more of foreign exchange.
The discounted
Russian oil has provided some financial relief to India just as inflation
skyrockets alongside surging prices of everything from food to fuel. The access
to cheap crude is already boosting India’s petroleum imports, which grew almost
16 per cent in April from last year. The share of oil from the Eurasian region,
which includes Russia, expanded to 10.6 per cent in April against 3.3 per cent
a year earlier, according to Ministry data.
Overall this may help
the RBI manage a bit with ease, but it does not check depletion of forex
reserves down to $593 billion. It would require government to open up its fist
on taxation side. The recent GST decision to bring milk products and so far
untaxed commodities, hospitality and tourism sector, health sector, under its
net may have deleterious effect on consumption, though government finances may
show some better numbers. In effect, it would further hit the purchasing power
that may impact real growth. Tax revenue numbers may not be indicator of the
actual growth process.
It is being said that
India is in a better situation than many other economies to navigate a
recession in the US and Europe as that is expected to cool oil prices. It
slumped from $121.46 on July 4 to $113 two days later. The Citi Research says
that if recession unfolds oil can slump to $60. Since it is expected
that India would do better, the government would be prudent to pass on this
benefit to the consumers that it did not during the pandemic almost zero price
situation. Had it passed on such benefits, possibly it could have cut on the
heavy food dole burden. Political considerations and impending elections are
keeping the government under pressure in winding it up. High taxes on fuels and
tolls are hitting all, including the industry, hard and leading the country to
a kind of vortex.
The banks are going
under stress with slew of road, high speed rail and other infra projects. Some
business houses have borrowed over Rs 34,000 crore from consortium of banks. The
latest decision of the RBI on relaxation of cash reserve ratio and statutory
liquidity ratio on foreign currency and rupee denominated term deposits on NRI
deposits for inviting funds, stretches a bit far. Some experts say that
measures are fundamentally good for attracting funds.
In effect it increases
cost on the banks, already under pressure. The large corporate lending with
little chances of early repayments may create a stress on the system. So will
the oil deals with Russia come to aid? Oil costs about $87.3 a barrel, about
$26 less than western crude. But if oil slumps to $60 would Russian crude also
come down?
So far it has not
helped the rupee recover. It hovers over Rs 79.24 to a dollar despite
continuous RBI intervention amid suggestion that it should allow rupee to find
its base. With inflation expected to keep
pressure on the RBI bank to raise rates, foreign investors are expected to wait
and watch how the interest rate differentials with the US play out before
starting to reinvest in Indian markets.
If the corporate
resort to external borrowings, it has to be seen whether it helps the Indian
economy or not. There are apprehensions that the overall debt burden on the
country can increase. The debt repayment is a bigger concern, particularly when
the sales in the market remain stymied. It has very worrisome figures. The
world economy is estimated at $90 trillion. But the world is in a debt trap.
Its total debt of governments, corporate and other entities are of $305
trillion.
In other words, the
glittering world of GDP is subsisting on ballooning interest rates and
artificial non-existent inflationary money. The development paradigm is an El
Dorado. While for short term, the RBI prescription may help, the country has to
evolve an economic system that is different, less globalised, more swadeshi and
which sustains on a sound footing. India has to redraw its economic contours
with a multi-support parallel system that can thrive even in the most adverse
conditions. --- INFA
(Copyright, India News
& Feature Alliance)
New Delhi
9 July 2022
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