According toThe Economic Times, this week, Indian authorities will discuss various proposals to support the weakening rupee, including imposing curbs on overseas investments by local companies and restricting pre-payments on foreign loans.
The newspaper said a sub-committee of a high-powered committee called the Financial Stability Development Council would meet on 8 December to discuss these proposals.
The rupee has tumbled about 13 percent against the dollar this year, making it Asia's worst-performing currency, and has placed monetary policy-makers in a fix because of its implications on the current account deficit, inflation and capital inflows.
Some relief for the currency came last week as it logged its biggest single-session gains since 2009 — 1.4 percent — on 1 December, buoyed by hopes of dollar inflows, one day after the world’s six major central banks, including the Federal Reserve, announced co-ordinated monetary action to help ease a growing liquidity crunch triggered by the eurozone crisis.
Unfortunately, those gains are likely to be short-lived. Among the key reasons for the rupee’s plunge has been heightened aversion to risk-taking by global investors, who proceeded to dump relatively riskier emerging market assets in favour of safe havens like the US dollar. Given that the eurozone is still lurching from one crisis to another, it would be reasonable to expect to rupee to face continuing volatility.
India's monetary authorities have tried to prop up the rupee recently by easing foreign investment limits on government and corporate debt, but as Firstpost noted in an earlier article, that's an open invitation to volatile flows instead of seeking the longer-term — and more stable — foreign direct investment.
Currency controls: can they work?
In truth, there's little the central bank can do to avoid the rupee from falling. As The Economic Times noted, while India has foreign exchange reserves of about $300 billion, it also has external repayment obligations of more than $100 billion for the 12 months to June 2012. So, the RBI doesn't exactly have a lot of money to burn defending the currency.
Worse, too many controls could put off investors, who might then become even more wary of investing in India. Local companies might also chafe under too many forex restrictions.
Most experts believe the government/RBI's possible actions are more likely to send a signal to the markets. “The central bank is assuring people that it will act proactively which should put an end to a lot of speculation,” Roy Paul, a deputy general manager at Federal Bank in Mumbai, told Bloomberg. “I think the volatility will ease off even though it’s difficult to make a judgment about the weakness in the exchange rate.”
Indeed, most experts expect the rupee to remain weak in the medium term, despite any RBI action, given the global economic uncertainty and local slowdown. An HSBC report released last month noted that policy makers would be willing to accept the rupee’s weakness as a necessary part of the economy’s rebalancing, provided the currency’s weakness from current levels was measured.
That's the key word — "measured". That means the RBI's actions will not be aimed at stopping the the rupee from sliding, but from sliding too rapidly.
Most economists expect the central bank to really pull out all the stops only in case of a huge global crisis, such as a possible collapse of the eurozone. After all, things could get a lot worse and the RBI would not want to exhaust its limited ammunition too early.
For now, the expectation is that the rupee will remain around 50 against the dollar, at least until March 2012. With increased RBI action, the rupee might not get much worse, but it won't get much better either.
At 10 am, the rupee was trading at 51.39 against the dollar.