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Last Updated : Sep 14, 2018 12:34 PM IST | Source: Moneycontrol.com

Ahead of PM Modi's economic review meet, economists warn against populist moves to arrest rupee fall

Economists believe that the government must take immediate measures to boost exports to earn more dollars and contain the trade and current account deficit.

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Several economists suggest that the government and Reserve Bank of India (RBI) should refrain from populist moves such as fuel tax cuts to prevent the rupee from falling further.

The rupee has been depreciating over the past few weeks. Prime Minister Narendra is expected to meet top government officials including Finance Secretary Hasmukh Adhia and members from his economic advisory council  to review the current economic scenario on September 15.

The Indian currency continued it gaining momentum on Friday as it gained 49 paise in the opening trade. It opened higher at 71.70 per dollar versus 72.19 Wednesday.

Also read — Rupee to be in 70-74/$ range, crude to remain volatile; both to impact these top stocks and sectors

Economists cautioned the government against pressing the panic button and band-aid solutions as these would only encourage currency manipulators to further exploit the situation.

They, however, said that the government must send a clear signal to foreign investors that it will stick to the fiscal deficit target of 3.3 percent of GDP in FY19 despite the upcoming 2019 general election. This may boost the confidence of foreign investors and minimise instances of volatility.

Finance Minister Arun Jaitley, NITI Aayog vice-chairman Rajiv Kumar, Prime Minister's Economic Advisory Council (PMEAC) Chairman Bibek Debroy and Finance Secretary Hasmukh Adhia are expected to ask the RBI to intervene in the market as well as discuss options such as NRI bonds to prop up the rupee.

Also read — How NRI bonds helped stem rupee fall in the past

Moneycontrol had first reported that the government may consider opting for overseas borrowing through Non-Resident Indian (NRI) bonds or deposit scheme.

NRI bonds are forex deposits raised from non-resident Indians at attractive rates for a period of 3-5 years, with some lock-in and an implicit RBI guarantee. The government floats these bonds to get a foreign pension and institutional funds.

RBI had earlier — 1998, 2000 and 2013given nod for an issuance of NRI bonds to arrest a sliding rupee.

Many non-resident Indians (NRIs) had in the past grabbed cheap loans in dollars and parked in India to take advantage of the 200-300 basis points difference between the interest rate on NRI bonds and the rate at which they borrowed, Pronab Sen, former chairman of the National Statistical Commission told The Financial Express.

Also read — No end to rupee woes, could touch Rs 75/USD in FY19; Sensex could hit 40K: Poll

A $30-35 billion issuance of NRI bonds would change investors’ perception of the rupee and help stabilise it, Bank of America Merrill Lynch Chief Economist Indranil Sengupta told the paper, adding that all the three instances of NRI bond issuances had stopped a contagion in the past.

Economists believe that the government must take immediate measures to boost exports to earn more dollars and contain the trade and current account deficit.

Some of the economists argue that the rupee’s depreciation to 72-73 is far from a crisis-like situation. The fall is reportedly a natural correction as the domestic currency remained stable and over-valued for long.

"The rupee is a little overblown now, which is temporary. The government doesn’t need to do something special except to curb volatility. It should stick to deficit targets and spell out clearly how it implements (crop) MSP programmes,"  DK Joshi, chief economist at Crisil said.

Also read — Rupee weakness continues: 5 key points analysts want you to know

Sen added that the government should fasten goods and services tax (GST) refunds, address rural distress and take concrete steps to boost jobs.

GST refunds may ensure that the working capital of firms, especially MSMEs, flows smoothly. The government needs to address "rural distress" to ensure higher crop prices to farmers as well as create employment opportunities to help consumption grow.

“Fiscal prudence, high growth and RBI commitment to keeping inflation controlled and stable through its inflation targeting approach should send investors a loud signal on India’s macroeconomic stability,” Saugata Bhattacharya, Chief Economist at Axis Bank, said, adding that the current concern on rising trade and current account deficits would moderate eventually.

Many economists feel that the economy is now in much better shape than what it was in 2013 when the rupee hit 68.85 against a dollar. Challenges ahead, however, include the worsening of the current account deficit, which exerts pressure on the rupee. Forecasts state that it may worsen to around 2.5 percent of GDP this fiscal mainly due to elevated oil prices.

Foreign portfolio investors (FPIs), who were net buyers of equity and debt last year with net inflows of around $27 billion as of December 29, also turned net sellers this year with net outflows of around $7 billion up to August 31.

Forex reserves and low-inflation may, however, help the economy to deal with the current situation. Although forex reserves have dropped to $400.1 billion as of August 31 on suspected intervention by the central bank to curb rupee volatility, economists believe that these are still enough to deal with the current situation. Inflation, which hit a 10-month low of 3.69 percent in August, is also likely to remain within 4-5 percent.
First Published on Sep 14, 2018 12:34 pm
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