The concern is largely fuelled by oil: Brent crude is now trading at around $ 76 per barrel, its highest since November 26, 2014.
The Centre and the Reserve Bank of India (RBI) seem to be in panic mode with the rupee crossing the 67-to-dollar mark and weakening by about Rs 3.5 so far in the current year alone. The concern is largely fuelled by oil: Brent crude is now trading at around $ 76 per barrel, its highest since November 26, 2014. The rising oil import bill and far from satisfactory export growth has led to India’s current account deficit widening to $ 50 billion in 2017-18 and a projected $ 75 billion in 2018-19, as against $ 26.86 billion, $ 22.15 billion and $ 15.30 billion in the first three years of the Narendra Modi government. That, coupled with capital outflows (since the start of April, foreign portfolio investors have made over $ 3.3 billion worth of net sales in India’s equity and bond markets), has led to a drawdown of more than $ 4.2 billion in the RBI’s foreign exchange reserves.
But does this justify the reaction, especially by the RBI? The central bank, on April 27, eased rules to allow Foreign Portfolio Investors to invest in government bonds or securities and state development loans with a residual maturity of below one year with the caveat that at any point of time, such investment should not exceed 20 per cent of the total investment of the FPI. Similarly, foreign portfolio investors have been allowed to invest in corporate bonds with a minimum residual maturity of less than one year. It is not just the opening up of the window for portfolio flows. The RBI has also liberalised the rules for foreign borrowing by Indian firms. Both these measures are presumably aimed at ensuring higher inflows, even if it means creating or adding to debt and reflecting the policy mindset which has prevailed on management of capital flows — marked by the switching on or off of the tap for calibrating foreign inflows. That’s what the central bank and government have taken recourse to each time the rupee has come under attack or when the Current Account Deficit has widened as was the case from 2011-12 to 2013-14. At the peak of the rupee crisis in mid-2013, the government increased the investment limits or quota for overseas funds in rupee debt. Yet, for years, India’s policymakers had kept the lid on short-term debt inflows especially in government bonds or securities, including treasury bills, because of potential volatility and destabilising flows — which is why the current move to review what was considered by many as prudent investment limits for FPIs appears worrying. This is specially so after taking into account the rebound in global growth.
What these moves point to, despite indications of an uptick in growth in FY19, is an underlying weakness in the economy. Addressing it includes reviving stalled projects and getting the entrepreneurial spirit going and further easing rules to encourage FDI. Else there will be a high cost to pay for opening up the short-term debt tap.
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via Take the long view | The Indian Express