Financial Daily from THE HINDU group of publications
Wednesday, Jul 23, 2003
Financial Daily from THE HINDU group of publications Wednesday, Jul 23, 2003 |
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Money & Banking
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Forex Columns - On Mint Street RBI debating options on rising rupee P. Devarajan
BETWEEN rupee appreciation and trade liberalisation, the Reserve Bank of India could well be in favour of lowering import duties, going by the talk on Mint Street. The rise in rupee against the dollar on the back of strong inflows into the equity and debt markets could place the central bank in a spot as it may not have enough securities to run its open market operations (OMO). That may not happen in the near or distant future, but RBI is looking at options to ride out any such eventuality. The central bank could be having in its kitty anywhere around Rs 1,00,000 crore securities, estimate market men. At present, RBI buys dollars from banks against rupee and sponges rupee liquidity by selling government securities. The first option could be buying dollars from banks with 90 day T-Bills, with the Government taking on the interest burden. The outflow will impact fiscal deficit, but could be adjusted against the hefty profits RBI turns in to the Centre every year. A leading banker felt there is a sterilisation cost and it may be best if the Centre and RBI share it. RBI takes a second hit when dollars are invested abroad in low-interest sovereign securities. A second option could see RBI running a special deposit window for banks to park their rupee funds earned from dollar conversion. RBI could be paying a nominal interest on the funds, though the RBI Act will have to be amended for putting in place the facility. Is it possible to get banks to park the conversion funds alone in the window? A third alternative could be for RBI to float special medium-term rupee bonds as currency to be paid to banks in lieu of dollars. RBI will be paying interest on the bonds. Banks could pick up dollars from the open market in the event of a return flow of dollars. This again needs an amendment to the RBI Act and is not novel, as central banks in Sri Lanka and Korea have been doing the same. Interest payments could strain the Centre or the RBI but that may be necessary if dollar inflows get stronger. Seemingly the RBI is quite busy on the job, but details are not available. Despite capping interest rates on non-resident deposits, bankers are aware of the legal arbitrage opportunities the equity and debt markets have thrown up in recent months. Indian markets give the best out-turns and too many are running in including the corporates and politicians who have funds overseas. Excess rupee liquidity has not helped the economy a wee bit, with bank lending rates quite out of sync with market trends. RBI may not be keen on a rupee-dollar fluctuation breaking the five per cent per annum band on either side. More, it could affect exports though it is time quality pushed Indian merchandise. Trade liberalisation, with an across the board cut in import duties, could see the Indian economy turn more efficient and the effort is tied to banks cutting down lending rates. Recently, bank chairmen have been visiting RBI to take a talk on chipping the PLR, which have for too long remained in the 10.50-11 per cent zone. Yet, nothing has happened.
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