Letters: Short measures

The Reserve Bank of India (RBI) has announced certain liberalising measures relating to the capital account. The central bank’s press release does not mention the objective, but one can guess it. If the idea is to improve capital inflows to relieve the downward pressure on the rupee, it is not likely to be realised by raising the ceiling on foreign subscriptions to government securities. They will go into the forex reserves of the RBI, which will give an equivalent credit to the government account in rupees. Thus, the funds will augment the bank’s reserves and not the forex supply in the market. There may not be any addition to net RBI credit to the government. RBI should clarify the accounting procedure for the benefit of analysts. It will, however, mean the monetisation of current fiscal deficit that will have an expansionary effect on money supply. This is worse than what is done now through the buybacks of gilts under open market operations, which imply retrospective monetisation of the past fiscal deficit. The response is not likely to be large since foreign subscribers have to bear heavy hedging costs against the possible depreciation of the rupee at the time of redemption of the securities.

A Seshan Mumbai

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