RBI steps in to support rupee!Policy push only option!

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Policy push only option

OUR SPECIAL CORRESPONDENT

Finance ministers of Trinidad, India and Israel, Winston Dookeran, Pranab Mukherjee and Yuval Steinitz, in New Delhi on Thursday. Picture by Ramakant Kushwaha New Delhi, Dec. 15: Finance minister Pranab Mukherjee today reaffirmed the importance of reform measures such as the contentious FDI in retail and goods and service tax to revive a slowing economy — as the scope for alternatives such as a fiscal stimulus and the lowering of interest rates is limited. The UPA had recently proposed 51 per cent FDI in retail but had to beat a retreat in the face of a vociferous Opposition. The goods and service tax proposal, too, has faced stiff resistance from the BJP. The government has to take policy initiatives to kick start a sputtering economy as options for fiscal stimulus and lowering of interest rates are limited, Mukherjee said today. "However, there is potential for policymaking in other areas," the minister said. Indian industry contracted 5.1 per cent in October, the first time since March 2009, sparking stock selloffs by foreign institutional investors and a fall in the value of the rupee. "We must turn our attention now to reviving growth as quickly as possible," Mukherjee said. The slump, the minister said, is "partly a reflection of global trends, but our own fight against inflation has also taken a toll on investments by our corporations". The Reserve Bank of India is expected to come up with its quarterly monetary policy tomorrow, but bankers do not expect any policy rate cuts as inflation still remains above 9 per cent as it has for the better part of the calendar year. Sharp increases in interest rates by the RBI to batter down inflation have slowed down growth; with inflation still high, the central banker has few options to give growth a push. Many believe it could ease money supply by cutting the cash reserve ratio. The government is also unable to come up with any major extra spending plans which can boost the economy. The government needs to "come up with practical policy options to address the challenges before us", Mukherjee said.

RBI steps in to support rupee OUR SPECIAL CORRESPONDENT Mumbai, Dec. 15: The Reserve Bank of India today halted a speculative hedge play against the floundering rupee even as the currency swooned to a fresh low of Rs 54.30 before the central bank intervened and sold dollars to revive it. After another torrid day for the rupee on the forex markets, the RBI announced a raft of measures to squelch speculation against the rupee and put a lid on the demand for greenbacks. It barred foreign institutional investors, exporters and importers from cancelling and rebooking their forward contracts on dollar-rupee hedges with tenors of less than 12 months. A forward contract is a transaction between two parties to buy or sell an asset in the future at a price agreed today. Unlike futures contracts that are transacted through a clearing firm, forward contracts are privately negotiated. The RBI also brought down the open forex positions that banks can have. Earlier in the day, the central bank intervened by selling dollars and bolstering the rupee which closed with a seven paise gain overnight at 53.65 against the dollar. Earlier, the FIIs were allowed to hedge the currency risk on the market value of their entire investment in equity/debt in India on a particular date. They were also allowed to rebook the contracts up to 10 per cent of the market value of the portfolio at the start of the financial year. This facility has now been withdrawn. However, the FIIs have been permitted to roll over their forward contracts on or before maturity. The rupee has been projected to fall to Rs 58 to the dollar and the weakness in the forex markets sparked a scramble to rebook currency hedges. The RBI chose to step in and stop the hedging game before it exacerbated the downtrend in the rupee. "Forward contracts, involving the rupee as one of the currencies, booked by residents to hedge current account transactions, regardless of the tenor, and to hedge capital account transactions, falling due within one year, were allowed to be cancelled and rebooked. It has now been decided to withdraw the above facility. Forward contracts booked by residents irrespective of the type and tenor of the underlying exposure, once cancelled, cannot be rebooked," the central bank said. Treasury chiefs said that this measure could positively impact the rupee when trading resumed tomorrow. "There was a huge demand for dollars due to such cancellations and re-bookings. The RBI now wants to ensure that such kind of demand is removed," Moses Harding, executive vice-president at IndusInd Bank, told The Telegraph. The central bank also reduced the amount of hedging that importers can take based on their past performance. This has been brought down from 75 per cent of the eligible limit to 25 per cent. With regard to banks, the central bank decided that both their intra-day and overnight forex positions would now be reduced. Analysts say this measure will restrict unnecessary demand for dollar. The measures to prop up the rupee were announced a day before the RBI holds its mid-quarter review of the monetary policy. Although observers expect the central bank to keep the repo rate and the cash reserve ratio unchanged, it is felt that the RBI may make some comments on the rupee in its statement tomorrow. "We could see some statement on the exchange rate. There will be a pause in the trend of interest rate hikes. Though at the current juncture, there is a case for a cut in the cash reserve ratio, it remains to be seen whether this is done,'' said Samruddha Paradkar, associate economist at CARE Ratings.

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