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: The rupee has hit 50 to a dollar. That’s proof that, by and large, RBI has done well by allowing the rupee to move. If RBI had tried to delay rupee depreciation from Rs 45 to Rs 50 a dollar, this would have unleashed the sale of assets by locals and foreigners trying to take money out of the country at an advantageous rate. Both the stock markets and the currency in India look well-balanced: there is no one-way bet. Bottom fishers are already visible, trying to buy assets at these low prices. While RBI has broadly done the right things on currency flexibility, there are several areas of currency policy that require urgent attention. First and foremost is the problem of non-transparency. Everybody has seen the sharp drop in reserves. In October, reserves dropped by $33 billion. In August, reserves dropped by $10 billion (but RBI bought $1.2 billion). In September, reserves dropped by $9 billion (but RBI sold $3.8 billion). In October, reserves dropped by $33 billion. But data for RBI’s trading has not yet been released. RBI’s non-transparency is now a major source of jitteriness in the market. A programme of transparency is urgently required. RBI must match the transparency of FIIs by giving out daily data for spot and derivatives trading. In addition, full details of the currency composition, and revaluation effects, of the reserves portfolio should be disclosed daily.
The next problem is that of dollar liquidity. As long as global credit markets are malfunctioning, there is a shortage of dollar liquidity. Some of RBI’s hoard can be productively used to assist Indian firms in this regard. But stealthy trading on the currency market is a sub-optimal way to do this. When RBI trades on the currency market, this is non-transparent. The quantities and prices become unpredictable. This increases nervousness. The better path for RBI is to announce beforehand a strategy of selling, say, $1 billion every fortnight through a public auction. This programme should remain in place until credit conditions in London markets stabilise. Through this, RBI would be augmenting dollar liquidity. But at the same time, RBI would not be a source of risk in the market. A programme of this nature is open and transparent; it supplies dollar liquidity with the minimal impact on prices. This is in contrast with the method of stealthy trading, which is akin to actions of a market...
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