These are happy portents for the rupee. Indeed, the manner in which the Reserve Bank has managed the transition should reinforce confidence that it is in command of the situation and will not let the rupee depreciate by more than is warranted by fundamentals. Excluding gold and SDRs, foreign currency assets of the central bank have grown from $17 billion at the beginning of the year to $19.5 billion as at January 3, 1997. The RBI has been buying dollars in the course of the year to build up its reserves position and thereby to provide for the contingency of repayment obligations bearing on the value of the rupee. This has helped to keep speculative pressures at bay.
Circumstances, too, have been kind. Despite the sluggish stock markets, foreign institutional investors brought in more than $2 billion in the current fiscal year up to December 1996. More than $1 billion was raised through GDRs. On the capital account, the government raised the cap on external commercial borrowings from $3.5 billion last year to $8 billion this year. And indications are that this cap may well be exceeded. The strong inflows have more or less taken care of the net repayment obligations, with some to spare. But as repayment obligations revert to normal levels of around $8 billion next year, perhaps normal levels of inflows should suffice to take the load off the rupee.
However, the changing profile of the debt portfolio could create problems. Whereas the governments own borrowings do not enter the market, private sector debt does: both at the time when the borrowings are made and each time when repayment of interest or principal is to be made. But the moment the rupee comes under strain, the herd mentality of everyone rushing to cover his payables position will be manifest. The rupee could, therefore, come under under severe bouts of strain once in a while. This means two things for the RBI. One, that it may have to continue to shore up its reserves in order to intervene decisively in cases of turbulence. And secondly that it will have to stay more alert to payment mismatches which have the potential of snowballing into minor crises.
