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India has no plan to pledge gold with the International Monetary Fund (IMF) to secure a loan, Raghuram Rajan, chief economic adviser in the finance ministry, told Business Standard. “There is no question of that. We have enough reserves.”
Rajan, who will bid farewell at North Block this week to take over as the Reserve Bank of India (RBI) governor on Wednesday, said India had enough dollar reserves to deal with the situation.
The speculation that India would pledge gold to secure a loan from the multilateral institution to prop the rupee’s value and finance the current account deficit (CAD) gathered steam last week when reporters asked IMF Communications Department Director Gerry Rice the same question in Washington. Rice said he did not want to comment on the issue.
India had taken loans from the IMF thrice in the recent past — in November 1981, January 1991 and in October 1991 — to the tune of $3.9-billion special drawing rights (SDRs), $551.93-million and $1,656-million, respectively.
In January 1991, India’s foreign exchange reserves had depleted to $1.2 billion. By June that year, even these reserves had dried, to the extent that these could finance only three weeks of essential imports. India had to pledge 67 tonnes of gold reserves to secure the IMF loan then.
Compared with that, India’s foreign exchange reserves are $278.6 billion today, enough to finance about six months of imports. However, some experts say given the way Indian currency is depreciating, India might face a situation similar to 1991.
When asked if RBI and the government would take more measures to arrest the rupee fall, as the steps taken by the RBI have proved counterproductive, Rajan said one would have to wait and see the response to the measures already taken.
The rupee had collapsed to a lifetime low of 68.85 against the dollar last Wednesday, before staging a recovery and closing at 65.70 on Friday. RBI might have to dip into its forex reserves to defend the rupee if the depreciation continues and CAD widens further. CAD had risen to an all-time high of 4.8 per cent of GDP in 2012-13. Finance Minister P Chidambaram had set a target to bring it down to 3.7 per cent of GDP in the current financial year.
On Saturday, Planning Commission Deputy Chairman Montek Singh Ahluwalia had clarified this did not mean CAD in the first quarter of 2013-14 would be as low as 3.7 per cent of GDP. It would be much higher than this, he had said. CAD had stood at 3.9 per cent of GDP in the first quarter of 2012-13, the lowest that year.
Ahluwalia had said the situation on CAD might not see any real improvement till the end of the first half of the current financial year. He had also said there are no plans to approach the IMF for selling gold reserves to boost the domestic currency. “Our current economic situation does not warrant it. I do not anticipate it in the near future. India’s reserves are comfortable.”
While an IMF loan would have political repercussions, the conditionality attached for bringing fiscal discipline could restore investors’ confidence to a certain extent.
According to officials, rather than seeking a loan from the IMF, India on its own could also take recourse to the prescriptions the fund would have suggested in a similar situation.
