The Hindu Business Line : Using the dollars

HAVING SENSIBLY ERASED arbitrage options on NRE deposits, the Reserve Bank of India has few monetary instruments left to cope with the spring flood of dollars, with the week ended April 9 seeing the foreign exchange reserves go up by $3.37 billion. In the near term, the central bank will be using the market stabilisation bonds to sterilise rupee funds flowing out of dollar conversions. A pointless exercise, it only shows up the weak investment scenario. Capital investment is not picking up — a fact admitted to by the RBI and the Finance Ministry — with the public and private sector still awaiting policy thrusts of a new government.

A strong rupee should help cheaper import of capital goods apart from keeping inflation down as crude purchases should cost less. Also, it allows the Government to keep off fractious cuts in import duties. The RBI is not averse to dollars landing in the country as even these large reserves place it only sixth among Asian nations with Japan leading the pack with a kitty of $826.6 billion. For the markets, it could imply low interest rates with call money expected to run below repo instead of being quoted somewhere between the repo and the reverse repo rates, as expected by the central bank. That can help only if the easy market rates get transmitted to bank lending rates, which still seem to be on the high side. A globalised market player like India seems to be nursing bank lending rates that are out of sync with world trends. That explains the appetite for low-cost external commercial borrowings, which the RBI frowns upon. The central bank's stance is unreasonable as it shuts out able corporates from accessing cheap funds overseas. Corporates would not be keen on going abroad provided the local banking system offers identical terms and that can happen if the RBI takes dollars out of the reserves and sells them to banks for funding projects at Libor-related interest rates. There could be some mismatch risks but that can be tempered with borrowers taking forward cover. Bankers have started talking to investors and some believe it will lead to start-up funding of infrastructure projects, but not before October.

The country may have to get used to the prevailing financial clime as foreign direct investments and portfolio funds will continue to seek out markets with the best returns and India is one of them. The BJP has promised to allow 26 per cent foreign direct investment in retail and this would only augment dollar inflows. One may not be entirely wrong in claiming that returns on Indian stock markets are quite satisfying. Yet, New Delhi has to look beyond and put in place reasonably drafted investment policies for various sectors, including agriculture, and help use the dollars. Recently, the NDA Government allowed corporates to invest abroad in agriculture even as Indian farmers waited for policies to help them. Why should corporates be kept out of Indian agriculture?