The last time the currency was roiled in this manner, in August 2013, the government took some pretty tough measures along with RBI. And, apart from this, under Raghuram Rajan, RBI facilitated the inflow of $30 billion of forex deposits by offering banks a cheaper swap option; not only did money flow in, when the time came for the bonds to be redeemed, there was not so much a ripple in the forex markets. Amazingly, despite recommendations that India should do another such issue—BofAML economist Indranil Sengupta had first suggested an NRI bond issuance when the rupee was at 67 to the dollar—the government never warmed to the idea; the fact that finance minister Arun Jaitley was recuperating and the chief economic advisor was demitting office may have been a reason for the government’s sluggish response.
It is not clear how quickly such a bond issue, were it to take place, will calm the rupee since, right now, the volatility is part of a larger emerging markets’ currency rout that has been aggravated by the possibility of trade wars spiralling out of control. But, there can be little doubt it will help since higher reserves mean RBI has that much more firepower at its disposal. Apart from this, however, the government would do well to find other ways to attract FDI. Allowing FDI in multi-brand retail, for instance, has the potential to bring in several billions of dollars immediately since, right now, several MNC retailers are trying to bolster their presence in India. And it is just as well that common sense finally prevailed and Sebi was asked to, for now, back down on its April 10 circular that would have put $75 billion of FPI money at risk—apart from the fact that Sebi did not even put up the issue for discussion before coming to a decision, as has been pointed out before, it never ever showed that funds run by NRIs were being used to round-trip money.
While raising import duties to curb consumption seems a good idea when the CAD is likely to be 2.8-3% of GDP, it will at best provide partial relief; it would be better to focus on areas where imports are large, growing fast and can be curtailed with sensible domestic policies. Despite all the talk of lowering import dependence, India’s oil and gas policy has not been investor friendly—not only have imposts been high, firms still don’t have complete marketing/pricing freedom. Nor is enough attention paid to lowering imports of other minerals that, between them, add up to around 30% of the country’s total imports. If India didn’t have the resources to mine gold or copper, such imports would just be seen as the price that needs to be paid for development. Yet, as Anil Agarwal of Vedanta points out, just 10% of India’s area with mining potential has been explored as compared to 95% in the case of Australia. With Rs 90,000 crore of the Compensatory Afforestation Fund Management and Planning Authority (CAMPA) funds still unspent, for instance, it is difficult to convince locals that allowing more mineral exploitation won’t endanger their livelihoods; and while Rs 18,500 crore has been collected under the District Mineral Foundation, to be used to benefit local people affected by mining, only Rs 3,552 crore has been spent so far. It would be a pity if the government didn’t use the current crisis to push through critical reforms.