What’s the point?

A A

Aug 09 2007, 00:00 IST

Tags:

There are no two ways about this. The Indian government’s clampdown on external commercial borrowings (ECBs) for domestic use, to prevent rupee appreciation, is simply bad economic policy. Even if, for the moment, we do not question the policy of tying the rupee down to boost exports, the question to ask is whether these new impositions can be effective. Maybe they will work for a few days. But the size of ECB inflows, both as a proportion of gross dollar inflows (4.5%) and incremental gross dollar inflows last year (5%), is so small, and the size of the currency market so big, that this measure cannot really work. The new restrictions could make a marginal difference to net inflows, but on the whole, they will do little to ease the pressure on the rupee. In any case, it isn’t the ECB surge that has pressured the currency up. Rather, it is India’s irresistibility as an investment destination. Therefore, the argument that net ECB flows doubled last year and so this is what needs to be brought under control is flawed. Take a closer look. BoP data shows that gross ECB inflows went up from $14.5 billion in 2005-06 to $21.9 billion in 2006-07, nearly touching the raised annual cap. But net flows, first-year repayments being negligible, rocketed from $2.7 billion to $16 billion. This may have alarmed policymakers, but it was not a runaway figure. Assuming gross flows of the maximum permissible $22 billion next year, net flows would be

... contd.

Ads by Google

Single Page Format

1 | 2 | Next