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PM Modi to take stock with key ministers, officials on Saturday amid worries over tanking rupee, soaring fuel prices

September 14
13:08 2018

Prime Minister Narendra Modi is expected to meet top government officials including the Finance Secretary Hasmukh Adhia and members from his economic advisory council on Saturday to review the current economic scenario.

Along with a team of bureaucrats and economists, Modi may work out a strategy to bolster market’s confidence and improve the macroeconomic scenario.

Despite robust GDP growth and falling inflation, India is facing the threat of a widening twin deficit—current account and fiscal deficit—led by a clamour for an excise duty cut on fuel as falling value of rupee against dollar has made petrol diesel more expensive for the common man.

Weakening domestic currency against dollar has hardened benchmark bond yields that have surged their highest in four years. The fall in rupee has also escalated import bill and depleted forex reserves to some extent.

On September 12, rupee plunged to a record low of Rs 72.91 against the dollar but recovered around to close at Rs 72.19. On Thursday, rupee closed at Rs 72.91 per dollar.

The rupee has fallen more than 13 percent this year, making it the worst performing Asian currency. Investors have been pulling out of emerging markets, betting on a stronger US economy.

Higher crude oil prices as well as concerns over an escalating global trade war triggered by the US and China’s retaliatory tariffs on goods imported from each other has had bearing on currencies across the world.

Asian currencies fell especially after Turkish Lira tumbled about 28 percent in August and 40 percent year to date after the US decided to double import tariffs on the country’s steel and aluminium.

Top government officials have regularly been in touch with the Reserve Bank of India (RBI) and are taking necessary steps to contain the rupee’s fall. In fact, sources in the finance ministry also said that markets need not panic about depreciating rupee.

The government is ‘conscious’ of the current situation and is taking steps to arrest currency depreciation, a key government official had said earlier this week.

The government may consider opting for overseas borrowing through Non-Resident Indian (NRI) bonds or deposit scheme, as well as take steps to reduce current account deficit (CAD).

In a scenario such as this, what are the policy options to stem the rupee’s fall?

As the country’s central bank Reserve Bank of India (RBI) has a responsibility to prevent economy from currency shocks. Central banks world over intervene through buying or selling of currencies through banks. To prop up a weak rupee, the RBI sells dollars in the market. The government can also ease foreign investment norms to encourage dollar inflow.

What are the other options to arrest the rupee’s slide?

Moral suasion

  • Sometimes central banks convince banks to carry out certain acts through non-official persuasion as opposed to official instructions or a statutory decree.
  • RBI can persuade banks and FIs to raise cheaper dollar denominated funds from overseas markets and then lend these to domestic borrowers in the form of rupee loans.

Quasi sovereign bonds

  • The government may decide to float quasi-sovereign bonds to attract longer-term NRI funds
  • The Resurgent India Bond (RIB) 1998, and the India Millennium Deposit (IMD)  2000 were also similar bonds targetted at channelising NRI savings into India
  • The government may also ask some public sector companies to raise funds abroad.

Export boost, import curbs

  • The RBI can decide to make import payments in a staggered to prevent a persistent drain on forex reserves.
  • Higher customs duty on luxury goods and other consumer items will dampen demand and slow down dollar outflow.

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