Rupee Stabilization Measures
Srinivasan Iyengar
Great Lakes Institute of Management
Introduction: As per the market principle, when demand of any commodity increases its price increases. So, in our current scenario, due to the turbulent economic conditions (Euro crisis and high inflation), people (or nations) want to resort to safer currency (commodity) – which is dollar. Hence, in this case when demand of dollar w.r.t. rupee is increasing it would mean that value of dollar will increase that is one would need to pay more rupees to get one dollar. This is what is triggering the volatile exchange rate of the rupee against the dollar. Major factors affecting the exchange rate : Differentials in Interest Rates (central banks exert influence over both inflation and exchange rates by c hanging the interest rates eg : REPO, CRR etc. ) Differentials in Inflation(relative inflation between trading nations, wherein the nation with lower inflation i s in an advantageous position) Current-Account Deficits(the balance of trade between a country and its trading partners) Public Debt(large-scale Bond financing to pay for public sector projects and governmental funding) Terms of Trade (agreement between trading nations eg : Most Favoured Nation). Measures by the Government and RBI to stabilize the rupee : The aim here is to increase the supply of the dollars in the market which in turn would help to project the country as “investment- friendly” in the global market.
·The most obvious of all, is the RBI intervention by infusing dollars in the market. As of now the nation’s Forex reserves are over $ 300 billion (which covers 95% of the country’s external debt).So, RBI in the course of manipulating the rupee against the dollar would very soon run out of its dollars, if it keeps pumping its dollars into the market. Also, it is not a viable option in the long term. Also, since the dollar is a globally traded currency (having a far wider reach than any other currency), efforts by RBI to revive the rupee against the dollar won’t help much. The Government should consider increasing the FDI in the sectors like the retail and aviation – wherein there are players ready to invest in India. (eg : In aviation sector , Singapore Airlines is ready to foray in FDI and in case of retail – IKEA ). The impetus should on the development of the infrastructure, which will help to pump in dollars in the nation. (Though there are foreign players in collaboration to build infrastructural projects in India), the Government should reduce the redtapism in order not ·to lose these investment opportunities by the foreign investors to others in the BRICS (Brazil, Russia,India,China, Russia)
February 2013
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