The Hindu Business Line : Stemming the dollar tide

IF THE RESERVE Bank of India is for stemming dollar inflows, it should have done away with the interest rate differential between Non-Resident (External) Rupee deposits and Libor (London inter-bank offered rate). It could have gone bolder by fixing the interest rates on NRE deposits some 25-50 basis points below Libor as in the case of FCNR(B) deposits where the rates are set 25 basis points below Libor. Slow-motion cuts in interest rates on NRE deposits have not been of much help with forex reserves crossing $90 billion and set to touch the wonder $100-billion mark before the fiscal is out.

This no more speaks soothe for the country's financial managers, who are privately praying for a let up in the dollar flood. That may not happen by current reckoning as the stock market is on a high, and everyone who is anyone in the financial world betting on a 6-7 per cent GDP growth as the monsoon has not poured as well in a long time. If proof be needed, the Securities and Exchange Board of India has put FII inflows in October at $1 billion For some more time the RBI's financial skills will be tested as it strives to bring some symmetry among low interest rates, low inflation and an appreciating rupee. This is like managing the impossible, aver economists, and it may be best for the RBI not to bother too much about an appreciating rupee, as imports that go into exports will turn cheap to benefit the exporting community. High import tariffs provide reinsurance from international competition, and should offset the benefits of an appreciating rupee.

For the ruling NDA, a rising rupee is a better proposition than high interest rates and prices, a month ahead of the first of the crucial Assembly elections. At RBI Towers, the worry is over vacuuming the excess rupees from the financial marketwhat with stocks of government paper depleting to run open market operations. As dollars come in, counterpart rupees will choke the trading floors, as is happening now. The RBI could think of a floating repo linked to daily market movements rather than a fixed repo of 4.5 per cent. Low interest rates in the market place are out of sync with bank lending rates, and the RBI has yet to muster courage to pull up bank chairmen. Instead, efforts are on to discourage external commercial borrowings, when they are far cheaper than the money offered by banks.

There is nothing wrong in corporates pushing for the ECB advantage, as it will bring down investment costs provided the companies fully cover their liabilities — a point the RBI has been sensibly making for a long time. Fully covered and cheaper, the ECBs should not hurt banks though the RBI and the Finance Ministry prefer rupee to dollar loans to bale out Indian banks. Banks are under pressure to compete with foreign banks and cannot forever come up with the tiresome excuse of high NPAs to charge steep interest rates. Farm or infrastructure loans should not cost beyond 9 per cent if the economy has to sensibly absorb the plenitude of dollars. Economic policy may not be on the portfolio of the RBI, but bank lending rates surely are.

Article E-Mail :: Comment :: Syndication

Stories in this Section
Stemming the dollar tide

Neoliberalism, investment and growth in Latin America

Beating about the Bush

General Council meeting of WTO — Picking up the threads from Cancun

NPAs: Not a complete write-off

Labour reforms

Falling tea prices