RBI cannot rescue rupee, want to know what will?

Despite the Finance Minister deferring GAAR by a year and the central bank’s surprise open market operation (OMO) purchase auction of bonds for Rs 12,000 crore on Monday, the rupee today slipped back to 53 against the dollar.

Brokerage firm CLSA just added to investor woes by saying that rupee may end the year at 55! And what’s worse? the RBI cannot come forward to save it this time.

So what can actually save the rupee? The government - By adjusting its balance of payments on the current account.

Capital flows and current account numbers are both equally important for the currency. But with RBI concentrating only on the current account side, it is essentially just trying to deal with the symptoms rather than the underlying problem," said Malik in an interview with CNBC-TV18.

While capital flows is volatile in itself, the current account deficit, where a country’s imports are higher than its exports, cannot be corrected immediately as it has an impact on growth, warned Malik.

“While RBI is trying to buy time by some of the measures they have announced, the real solution lies with the government in terms of how the balance of payments on the current account is actually adjusted and you can’t have a dramatic adjustment. It has consequences as far as growth is concerned,” he explained.

But apart from CAD and escalating high oil prices there are other issues that need to be looked at.Inflation is high and even if the government does raise the minimum support price, sticky inflation will be back. Moreover, looking at the macro picture, it is evident that the US dollar is going to be stronger in the second half of the year, which will have a direct bearing on the rupee.

Malik is not optimistic about where the rupee would end this year as he says the fairy tale scenario of lower oil prices and ample capital flows into India is not going to play out this year. He adds that the real problem in India is consumption driven growth, rather than investment-driven growth.