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Finance Minister’s attempt to pacify the markets by announcing a series of measures to control the declining rupee has failed to have any impact. Rupee continues to slide, ignoring the announcements completely.
Market has seen through the measures and has identified them to be cosmetic in nature. Some of the announcements have already been talked about earlier and has been discounted in the market while some others will have little impact, if any, on the economy. Ironically, a few of the measures will only aggravate the problem further. Chidambaram's attempt to sweep the dirt under the carpet only to be cleared on a later date has not gone down well with the markets.
P Chidambaram has said that his best case scenario for current account deficit (CAD) will be 3.7% of the GDP as compared to 4.8% in the previous year. Even this figure is higher that the sustainable level of 2.5%. For the market, this means that even the best effort by the FM is not good enough to bring the CAD within sustainable levels. Given the current state of affairs in India and globally, it is very unlikely that the best case scenario target will be achieved.
Let’s take a look at the measures announced to ascertain where the fault lines can appear.
Measures to control gold imports might work given the strict changes imposed by the central bank over the last few months. Government may eventually manage to keep the imports lower than its present target of 850 tonnes as compared to 950 tonnes in the previous year, if the trend of the first five months is continued.
Oil imports from Iran can also help in reducing CAD as the country is willing to trade in rupee rather than dollar. It would require the government to stand up against the US imposed sanctions to reduce the oil import bill by buying more oil from Iran.
Tinkering with import duties is like applying a band-aid to a terminal cancer case.
String of other measures involve raising more foreign debt through Sovereign Wealth funds (SWFs), quasi sovereign bonds, overseas corporate borrowings, NRI deposits and oil company finances. In a scenario of depreciating currency, these measures would just be kicking the can forward and postponing the problem to a later date. This is the game that the finance minister has played for over a year where a red carpet was laid for foreign debts. But a falling currency takes away all gains for a debt investor. Such policy measures are good in a stable currency scenario and not a falling one.
Further, such investments at a time when the US is thinking of sucking out liquidity will be detrimental and counter-productive.
What can soothe the markets is a pick up in the economy and reinvestments by corporate India, which in turn would give confidence to foreigners to invest in the country. Nothing in the announcements made by the finance minister addresses these issues.
Rupee’s fall despite the recent measures clearly shows that the finance minister is now running out of options to apply brakes to the falling rupee.He has clearly lost the fight to control the rupee. We are now left with the only option – a direct intervention by the central bank.
