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Free Fall, Fiscal Fix

BW Online Bureau Nov 08, 2014

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[There's a single message for those looking at the rupee's value: maybe further intervention by the Reserve Bank of India (RBI) is a bad idea. First off, we do not have the kind of reserves needed to protect the rupee's value. On a fundamental and structural basis, the rupee's value is quite representative of its current value against the dollar. Granted, the ‘fundamental' value is also being driven by events outside the government's or RBI's control (our economic fundamentals — the current account and fiscal deficits, and high, persistent inflation — are factored in). So is there anything else the government can do? Apart from gold imports — which are essentially unproductive assets — the trade balance is more or less stable, if high. There's higher customs duty on gold; and while that may dampen consumption, raiding it further will only increase illegal channels. Perhaps a quantitative cap might work better. Structural policy changes that boost exports — changes in certain sectoral policies and rules for special economic zones — might also help. But such changes will take time and will not bridge the savings-investment gap (that is currently being filled by foreign inflows like FCCBs and ECBs) quickly. Firms, government and ordinary folk have grown obese by ‘gorging' on foreign money (just look at the stock market, for instance). Perhaps it's now time to go on a crash diet (pun not intended). For a start, policymakers in government and the central bank must clearly state that intervention will stop, and the markets will decide the value of the rupee. Some RBI officials have begun to send out that message. It is time the finance ministry  followed suit. The only way is to get fiscally fit. (This story was published in Businessworld Issue Dated 28-05-2012)