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In
recent weeks, economic attention has been focused on the rupee, which
has registered a sharp fall in its value relative to the dollar. On
one occasion the rupee's value in intra-day trading even fell below
the psychological benchmark of Rs. 46 to the dollar. In the event, the
RBI, which till recently had been lauded for it efficient management
of India's balance of payments, appears to have suffered a loss in popularity.
This is not so much because of the depreciation of the rupee itself,
but because of the manner in which the RBI responded to that depreciation.
Industrialists and exporters are sore about the manner in which the
Reserve Bank of India has dealt
with the recent slide in the rupee's
value.
To start with,
in July, the RBI responded to the beginnings of the rupee's slide by
reversing its agenda of easing money supply and reducing interest rates
by periodically reducing both the Cash Reserve Ratio (CRR) applicable
to the banking system, and the Bank Rate, or the rate at which the central
bank provides credit to the banking system. The most recent set of such
reductions was announced on April 1, 2000. Four months later, the Bank
Rate which had been brought down in six instalments from 11 per cent
in January 1998 to 7 per cent as recently as April 2000 was, on 21 July,
hiked by one percentage point to 8 per cent. The CRR too was raised
by half a percentage point to 8.5 per cent. The RBI had decided to stabilise
the rupee by choking off credit and rendering it more expensive.
Underlying that
move was the perception that easy access to liquidity at low interest
rates was encouraging agents eligible to trade in foreign exchange markets
to book profits through arbitrage. So long as the expected slide in
the rupee vis-a-vis the dollar exceeded the cost of acquiring and using
rupee debt to purchase dollars, it paid to borrow rupee funds and invest
them in dollars for speculative purposes. In the belief that such speculation
played a role in the rupee's sudden depreciation, the RBI chose to mop
up some of the liquidity in the system and render credit more expensive.
When this action
failed to halt the rupee's slide, the RBI decided to force exporters
to convert into rupees a substantial part of their dollar holdings under
the Exchange Earners' Foreign Currency (EEFC) Account scheme introduced
in 1992. That scheme allowed exporters to hold a portion of their exchange
earnings in foreign currency accounts. Since exporters were eligible
to avail credit against such holdings to meet current expenses, holding
on to dollar revenues in the form of long term deposits was not much
a problem. What is more, to the extent that the rupee depreciated, increasing
the rupee value of these dollar holdings, the exporters garnered a higher
rupee return. Thus, the scheme, which was meant to facilitate easy access
to foreign exchange by exporters, became a means to maximise returns
by speculating on the likely depreciation of the rupee. Having discovered
that at the time of the rupee's slide exporters were holding dollar
deposits amounting to $2 billion, the RBI decided to reduce the ceiling
up to which such deposits could be held by 50 per cent, with an August
23 deadline for conversion, which triggered a conversion rush that stabilised
and even pushed up the value of the rupee. However, after the deadline,
by which date $850 million had reportedly been converted, the rupee
once resumed its downward slide, nearing the Rs. 46-to-the-dollar mark.
These manoeuvres
of the central bank were surprising to many because the rupee's depreciation
itself was not too substantial, especially given the perception that
currencies of India's competitors have, since the Southeast Asian crisis,
fallen far more vis-a-vis the dollar. The initiatives have also not
been received well. The decision to hike interest rates, coming in the
midst of signs that industrial growth is once again slowing has been
criticised by industry associations and individual captains of industry.
And exporters are sore about the curtailment of the EEFC account benefit
available to them. Rumour has it that sections of the bureaucracy which
are keen to dispel the impression that the growth rates of output and
exports during the years of reform have been low and volatile, and are
therefore in favour of a further lowering of interest rates and a depreciation
of the rupee so as to stimulate industrial growth and exports respectively,
are uncomfortable with the increasingly independent central bank chief. |
