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Government steps in as rupee continues to slide
September 15, 2018, 5:54 pm

Late on Friday, the Indian government stepped in to stem the steep slide in the country’s currency. Following an economic review meeting with the prime minister, India’s Finance Minister Arun Jaitley said the government plans to take measures to cut down “non-necessary” imports, ease overseas borrowing norms for the manufacturing sector and relax rules around banks raising rupee-denominated overseas bonds. Following Friday’s announcement, the rupee strengthened by 50 paisa to 71.68 against the dollar in early trade in the foreign exchange market.

Despite strong GDP growth, the Indian rupee has weakened by about 11 percent since January to emerge as the worst performing currency in Asia. Buffeted by high international oil prices and emerging market sell offs from a resurging dollar, the sliding rupee has also widened India’s current account deficit.

The balance of payment slid into red in the second-quarter of the year, the first in over six quarters, further stoking inflationary pressure in the economy. Soaring oil import bills have added pressure on the rupee and further widened the country’s trade deficit. Official figures show that India’s August imports stood at $45 billion against $28 billion in exports. Speaking after the economic review meeting, Minister Jaitley said, “Dollar outflows, trade wars and high global crude oil prices have hit India despite strong fundamentals.”

A falling rupee has also hurt the current account deficit and this needs to be dealt with “immediately”, he added. The Finance Minister said manufacturing entities will be permitted to make use of external commercial borrowings (ECBs) of up to $50 million with a minimum maturity of one year, down from three years earlier. Despite these measures, analysts say the slide in the rupee looks unlikely to be stemmed in the near future.

Markets that had been hoping for more robust intervention by the government such as the issuance of Non-Resident India (NRI) bonds were disappointed by the minister’s announcement. India had resorted to issuing NRI bonds to bolster its foreign exchange reserves during past currency crises in 1998, 2000 and 2013. Forex speculators were probably the ones most relieved by Mr. Jaitley’s statement, as they believe the puny measures being put in place would at best stop the slide for a day or two. However, the minister left the door open for further intervention by saying that more steps would be announced separately.

This could signal that the authorities were looking at other options, including placing curbs on imports of gold that in August rose over 90 percent to $3.64 billion. The government has already raised the goods and services tax on gold bullion this year and also taken steps to discourage gold imports that drain the country of its foreign exchange reserves. While Minister Jaitely did not mention any specific measures targeting the import of oil, the weakened rupee and higher oil prices have driven the price of fuel in the country to record highs in recent months.

It is also being reported that the government has been leaning on the Reserve Bank to do more and intervene aggressively in the foreign exchange market to support the value of the rupee. Figures from the Reserve Bank of India show that its foreign currency reserves toppled from a high of $426 billion in April of this year to around $400 billion in August, revealing that the country’s central bank has been selling dollars in the market to prop up the rupee. Since the global financial crisis of 2008 foreign institutional investors have pumped money into India’s debt and equity market.

It is estimated that between April 2009, and March 2018, foreign portfolio investors invested over $91 billion in the Indian stock market, and around $38 billion in the debt market. As interest rates in the United States goes up, a lot of this money is likely to leave the India. It is believed that since April of this year, foreign institutional investors have withdrawn 428 billion rupees, or nearly 11 percent of the money they brought into India’s debt market between April 2009 and March 2018.

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