ECONOMY,
EXCHANGE RATE
Illusory
Fall
The rupee is not the only currency falling against the US dollar. Most global currencies are. India only has to take follow-up action without panicking.
By V Shankar Aiyar
On April 26, when the Government extended the tenure of RBI Governor Bimal Jalan for two years, the forward rates (the rates for future sale or purchase of a foreign currency) for the US dollar fell, implying expectations of a stable rupee value. Such has been the reputation of Jalan a.k.a. Mr Rupee. Not without reason. After all, in the 30 months since he became RBI governor, the rupee had slid by just 6 per cent on an annualised basis-from Rs 37.9 to Rs 43.6 a dollar-while foreign exchange reserves had swelled from $25.9 billion to $35 billion.
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DOLLAR
IN, DOLLAR OUT
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| 1999-2000 Exports: $30 billion Imports: $47 billion Trade deficit $17 billion Loan repayments $11 billion Total shortfall of dollars $28 billion The shortfall was funded through: Software exports: $4 billion Remittances: $12 billion Official assistance: $3 billion Total: $19 billion But there was still a gap of $9 billion This was met through inflows of: External commercial borrowings: $3 bn Foreign direct investment: $2 billion Portfolio money (FII & VC funds): $3 bn NRI deposits: $2 billion India thus had a surplus of $1 billion |
2000-2001 Projected Exports: $35.5 billion Projected imports: $ 57 billion Projected trade deficit: $21.5 billion Likely loan repayment $12 billion Expected dollars shortfall: $33.5 billion Which could be funded through: Software exports: $5.5 billion Remittances: $13 billion Official assistance: $ 3 billion Total: $21.5 billion The gap could still be $12 billion This is expected to be funded by: ECB: Unlikely to be much this year FDI: Sluggish inflows so far Portfolio money: $297 billion till date NRI deposits: Expected to be $2 billion Unless inflows rise, rupee will be weak |
That was till April 2000. Since then both Mr Rupee and the Indian currency have had a torrid time. By August 16, the rupee had slipped to 45.90 a dollar-a value erosion of almost 5 per cent in less than five months. That triggered a panic most experts feel is uncalled for. Says Ramu Deora, former president of the Federation of Indian Export Organisations: "Every currency has fluctuations but only in India does it trigger a comment from top to bottom."
The RBI's main worry is not the slide in the rupee per se. "We are worried that headline hysteria may trigger expectations completely out of line with fundamentals-leading to their fulfilment," says a senior RBI official. In just three weeks since July 21, the RBI has hiked the bank rate (the rate at which it gives short-term loans to banks) by one percentage point, raised the cash reserve ratio, asked corporates to bring back foreign currency kept abroad and directed exporters to slash their foreign currency holdings by half. It has also tried to talk the rupee up by stating that the foreign exchange reserves were adequate, ruling out any cause for alarm.
But there is only so much that the RBI can do. After all, every major currency in the world, barring the Japanese yen, has depreciated against the US dollar in the past year. In most cases the depreciation has been higher than the fall in the rupee value. The French franc and German mark have depreciated by 14 per cent, while the British pound has fallen by over 6 per cent against the US dollar. Since the rupee has fallen by only 5 per cent in the past one year, it has actually appreciated against all global currencies-barring the dollar and the yen. The strengthening of the US dollar is a reflection of the continuing solid performance of the US economy which has forced the US Federal Reserve Bank to hike interest rates from 4.75 per cent in June 1999 to 6.5 per cent. Higher interest rates in the US make investments in India less lucrative, impairing inflows into the country.