Investors in India, Asia?s other major economies and in Europe seem to have responded to local and global assurances that the state is standing steadfast to help the markets. In India, the wholly unnecessary panic about ICICI Bank?s health has also subsided; hopefully punters who wanted to profit from such rumours have learnt that such bets are not worthwhile. It is clear, too, that maintaining liquidity will remain a top official target. The committee headed by Arun Ramanathan, finance secretary, is expected to give its suggestions shortly. There?s perhaps, therefore, time now to think about some of the issues that were understandably pushed aside in last week?s crisis atmosphere. First, while the government deserves a lot of praise for the way it handled the situation last week, some of its policies are also in the spotlight. Policies on oil and fertiliser contributed to the liquidity crunch. Oil and fertiliser firms have been feasting on bank credit because the government hadn?t issued oil bonds or released fertiliser subsidies. These will be done shortly as Parliament meets. But this is a roundabout indication that oil price policy and fertiliser policy are unsustainable. Maybe the next government should learn from this episode; obviously, this government isn?t reforming anything anymore.
The other issue is, what position RBI should take on the rupee. Let?s be pragmatic and accept that a floating rupee isn?t on the policy horizon. Then, two questions come up. First, how to encourage more inflows? Foreign currency non-resident (FCNR) deposits currently have an interest rate ceiling identical to Libor. A good way to attract dollar deposits would be to increase this to Libor plus, say, 200 basis points. Since Libor is around 5.4% now, this will translate into a very attractive rate of interest. The other policy could be to relax the ceiling on FII participation in debt, which is currently around $8 billion, $5 billion in government paper and the rest in corporate debt. The ceiling can be raised to, say, $15 billion, with the ceiling on g-secs becoming $10 billion. The second question is the nature of RBI intervention in the currency markets. RBI has been defending the rupee as a matter of course over the last few weeks and this is making the market safely bet on the rupee depreciating. Should RBI intervene so as to disrupt expectations? It has a largish foreign exchange kitty. But what if there?s a massive bet against RBI when it does this? This is a tough call that the central bank has to take.