Flood relief

External Commercial Borrowings (ECB) by M&A bug bitten Indian businesses have been partly responsible for the dollar deluge that drove up the Rupee to phenomenal 6% in a short period of 6 months.

To induce growth, RBI had earlier raised overseas borrowing and investment limits earlier. Now it’s altering its stance, giving in to the persuasion from domestic businesses that suffer the surging Rupee. The overall goal is to prevent the external borrowing window from weakening the financial discipline in India’s economy.

The government has announced fresh restrictions on external commercial borrowings (ECBs), capping the Companies to raise only up to $20 million abroad for rupee expenditure and only with prior RBI approval. Exemption shall only be for expenditure in foreign currency. For the rest, they will have to look for local financing. The funds raised abroad will have to be parked overseas till the actual requirement in India.

Despite Finance Minister’s warning, the effect was this.

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Bailout is for wimps

While the impact of Rupee appreciation is always arguable, the desirability and effectiveness of RBI intervention has become a moot point of debate.

The stronger Rupee buys more for less. Is that not an advantage? The inflation has come down from 6.7% (Jan 07) to 4.3% now. It is welcomed by bulk importers, acquirers of global companies and travelers. Those who raised forex loans earlier and are repaying now are delighted as less Rupees repay more dollars. Forego the advantage? We are net importers and it benefits the whole nation to have a stronger Rupee and that's preferable any day to a few IT exporters benefiting from weaker Rupee. The ones that worry are the Exporters of services including IT, textiles, processed food etc., the tribe which made a killing earlier when Rupee was the dog. They've had enough rain. Now let others soak it up.

Others argue that in India the correlation between stronger Rupee does not necessarily mean lower inflation. Our three principal imports are Crude, gems and jewellery and capital goods. While crude prices are administered, others don’t feature in inflation index. But crude prices were administered even while our Rupee was weaker and $/barrel was high. The administered pricing enabled us to pay less per litre of petrol - didn't it ? That's two-way street and it blunts the argument.

Look at those who clamor. They are the ones who get least hit - IT fellows that have 20% plus margin. They sit on huge cash cushions (built out of the earlier weaker Rupee days) in the balance sheet, have access to and can afford premium hedging tools like forward cover, currency swap etc., besides natural hedges presented by a multi-currency revenue streams from wider geographical distribution of businesses. Contrast them with some 65% of exporters that come from SME segment - that export at margins of 5-10%. Even a minor rise in Rupee wipes their entire profits out. But it’s the IT that clamors more.

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Frankly the question is not whether RBI should intervene. Ask "how effective will that intervention be" and "to whose benefit" in an increasingly flat world where volatility is the new atmosphere. Wake up and be nimble. Adjust swiftly to currency fluctuations. Asking for bail outs is for wimps.

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Plunge Protection Team for Indian markets ?

Contrast the underlying philosophy behind Government’s fiscal policy and RBI’s monetary measures, the clock is stuck at 10 past 10. Finance ministry wants the reforms to continue on the liberalization plank. Liberal SEZ, more FDI, lifting of investment caps, more resources freed towards industrial progress. All these boost forex inflow, enthuse the stock markets that have soared to dizzying levels. With SEBI also considering letting in big ticket investors like Hedge Funds have a direct exposure to Indian equities, barring short term blips, the long term India story is in tact and the buoyancy is likely to persist.

Not all are happy about it. The RBI and its Governor Dr.Y.V.Reddy are a worried lot for one. So far RBI has managed recessionary phases and forex crisis of different kinds over the decades. They are now facing a new kind of problem they’ve often not met with before – Forex reserves are building up at a faster clip than they can count, much less manage. With $ 203 billion as on April 20, 2007 as per latest available RBI statement, they’d better figure a way out to deal with it soon.

The normally intrepid Guv is close to pressing the panic button or is near as he can get, as he continues to let the Rupee appreciate against the US dollar, much to the chagrin of businesses with huge $ billings like IT, Healthcare and Telecom. Though he has also left all key rates unchanged and announced steps that would pave the way for lower interest rates on home loans in its annual credit policy - aimed at sustaining growth without fuelling inflation, it’s totally clueless where it comes to dealing with the mounting forex reserves.

Financial assets if badly managed can often spell disaster for any economy. Compare the 9.5% returns earned by GIC of Singapore as against India’s paltry 3.5%. Isn’t it time that we look at other economies that are handling the situation efficiently and adopt the best practices that worked well with them ?

I am not a fan of regulatory overkill. But if there’s a certainty of idea vaccum at the top, I’d better tweak my belief system than to let my tiny net worth erode. How about a working group on financial markets on the lines of Plunge Protection Team – may not be a panacea, but could well be a dry run to test internal efficacies in an emergency.

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What do you think ?

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