Why govt's rupee explanation doesn't hold water

The rupee again hit the 60 mark today. But unlike last week, when it had first breached the mark, the crossing was quiet. There was no chest beating, laments or fears.

This is not because nobody is bothered. It is probably because people have resigned to this new level as a normal at least for some time now.

The RBI, which had allowed the rupee to fall below 60 last week after defending it for long, did not step in too, asit is not too worried about the rupee’s move today, DBS Bank told_CNBC-TV18_.

Definitely do not expect any statements from the government as well because they have nothing new to say apart from repeating there is no need to panic and that the rupee’s fall is in line with other emerging market currencies.

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However, there is overwhelming evidence that suggest the government is being complacent and the rupee’s depreciation cannot be explained in simple terms like that.

Rajiv Mallik, senior economist, CLSA, is of this view. In an article in the Business Standard, he contests the government’s explanation.

“The rupee suffered much more than the Turkish lira, despite Turkey’s much worse current account deficit. The rupee and the Brazilian real suffered as much despite India’s much worse current account deficit,” he has said.

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Even a crash in global commodity price did not give a respite to India. The reason for this, according to him, is the misunderstanding that wide current account deficit is the only one factor that is driving the currency down, while “the actual trigger is the churn in capital account of the balance of payment”.

In other words, the easy money that had flowed into India went out in full force after the US Federal Reserve signalled an end to its asset buying programme.

The Indian government’s policy of favouring volatile capital flows aggravates the troubles as this does not complement the RBI’s correct hands-off stance.

According to Credit Suisse, in March 2013 quarter BoP was in surplus and FDI flow was stable. Local corporates are holding off investments, but not foreign investors. But the current account deficit (CAD), which is the second highest in the world, was funded largely through short-term debt flows, it noted.

An example of the government’s misunderstanding of the problem is its approach towards gold imports. The various measures and the moral suasion tactics by the finance minister suggest that the government is treating Indians’ penchant for gold as the ailment, while it is just the symptom, Mallik says.

This is not to say that the government is not acting at all. It is, but needs more urgency.

Consider this: the RBI, as of 21 June, has forex reserves worth just $288 billion.

“With reserve accumulation having stopped since 2008, import cover and short-term debt coverage have been falling. In particular, given the rising share of short-term debt in capital inflows, short-term debt cover is now less than three months, the lowest in two decades,” saidCredit Suisse, which is more concerned about the volatility of the rupee than its value.

As far as imports are concerned, the situation is scarier. The country is paying more for oil now than it had paid when crude hit the record $145 per barrel in 2008, says a DNA report today. This happens even as the crude oil prices falling. In other words, the rupee decline is negating any benefits from the oil price fall.

This is applicable to all imports. If the outflows continue and therupee remains under pressure, we will run out of reserves faster than expected.

The hesitation over FDI reforms, which are expected to bring in stable foreign capital, has to be read in this context. The home ministry has raised security concerns over raising the FDI limit in a few sectors. It is to be noted that despite this the Telecom Commission has suggested 100 percent FDI in the sector. But this is unlikely to result any serious inflows given the sorry state of the sector where legal tussles are the order of the day.

It is in these circumstances that Mallik sees the rupee hitting 65-70 next year, when the US Fed stops its asset purchase completely.