Red signals ahead: Pegging the dollar-rupee rate an expensive waste of forex reserves

By: |
Published: July 23, 2018 3:32:30 AM

The outflow of dollars from the financial markets has to be anticipated, not resisted. Any attempt to peg the dollar/rupee rate will be an expensive waste of forex reserves.

Representative Image

The no trust debate was pretty much as expected. The two sides talked across each other. Neither the complacency of the NDA nor the alarmist critique of the Opposition mentioned the challenges facing the country during the next six months, let alone six years. Indians think of its economy as insulated from the world. All problems are local and can be solved by the government, most often by giving subsidies, cancelling debts, increasing salaries of public sector employees, bailing out bankrupt PSU banks, and feather-bedding inefficient companies like Air India. In fact, India is one economy in a global context and it has to be mindful of the events across the wider world as well as the perceptions out there of India’s fiscal and monetary policies. Newspapers are full of projections of 7.3-7.5% GDP growth rates for 2018 and 2019. But that presumes the caveat of economists’ ‘other things being equal’. There is no way they will be.

The sharp signal came from the forex markets on Thursday. The rupee is gently depreciating . The context here is global. Trump’s tax cut has given incentives for American multinationals to bring money back home. This will be done by liquidating equity and bond portfolios these multinationals were holding to park their money somewhere with a reasonable yield. Trump’s tariff wars have raised anxieties in the global markets. But, paradoxically, the dollar has strengthened. This is the beauty about the dollar; in good times, as well as bad, the dollar strengthens. The US treasury bill market provides a safe haven in troubled times and a rewarding one when you are flush with cash and waiting for an investment opportunity.

The rupee/dollar rate is a price, not a totem of Indian macho power. It is good that RBI is managing to smooth the movements. The outflow of dollars from the financial markets has to be anticipated, not resisted. Any attempt to peg the dollar/rupee rate will be an expensive waste of forex reserves.

Global markets are jittery due to Trump, Iran, tariff wars and differences within the NATO as well as within the EU. That is one reason to urge caution on the government in its fiscal stance in the months ahead. The stronger dollar as well the expected hardening of the Fed in its interest rate policy will add to the burden of Indian businesses who have an exposure to the dollar. The government has to resist any temptation to go on a binge in the next six months to please the voters. As it is, inflation rate is high partly due to the oil prices, on which India has no control. If the government was to give any sign that it will deviate from the steady path of deficit reduction that finance minister Arun Jaitley has set during the last four years, the rating agencies will spread panic, and the outflow of foreign money from our equity and bond markets will become a flood. That in turn will depreciate the rupee even further and add to the risks of the dollar debtors and raise inflation rate. It would not be a good Diwali present to give to the country.

India has attracted a lot of FDI during the BJP/NDA years precisely because the message has been of a responsible fiscal policy and a firm anti-inflation monetary regime. Subsidies have been rationalised and their digitised targeted payment has saved money. This is smart governance. The demonetisation and digitisation have added several new names to the rolls of income tax payers. GST has improved revenue estimates. Even so, there should be no deviation from what was set out in the budget of last February. The next budget will be a vote on account. Wait till the election is won (as I expect the BJP/NDA to do) and then will be the time to make bold plans.

The most worrying matter is of Trump’s sanctions on Iran. India has been a friend as well as a customer buying Iranian oil. If Trump raises the stakes and hardens the sanctions, whatever the temptation to put friendship with Iran before compliance with sanctions, it should be firmly resisted. It is not just the availability of oil, it is the financial firestorm which will hit India if it became subject to US sanctions.

Economic success is a hard matter. Even when you are ahead of the pack, being the fastest growing economy in the world; it is good never to slacken. India needs a a decade or two of sustained high GDP growth, with inflation under control and sound government finances. The prize will come, but not by hurrying. The economic race is won by the bold, but resistance of the temptation to slacken and display prudence is the main ingredient of boldness.

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Next Stories
1Ron & roll: Cristiano Ronaldo’s move from Madrid to Juventus for a reported fee of £105 million could be a game-changer
2Inside Track: From Lord Alexander Carlile reaching Delhi to Kumaraswamy’s emotional outburst at Hubli
3Across The Aisle: France wins honours, Croatia wins hearts