Tn Alliances Isolate Maanila Congress
At some point in its life the RBI will have to make up its mind when and how much to trust the markets. In the latest instance, its governor has promised to take debt service as well as oil sector payments out of the market -- that is, pay for those remittances out of the reserves -- because of the "temporary demand and supply gaps that may emerge due to the impact of uncertainty or speculation in the next few weeks".
As a basic premise, if there is uncertainty in the market for whatever reason, be it political or the threat of another dose of sanctions or whatever, it should reflect in the price of the rupee. Obviously, one cannot expect to have a rock-solid rupee when part of the market expects the nuclear doctrine issue to escalate into a war of words, leading to some punitive action against the country. This is a plausible view and market agents are entitled to hold their own views. Uncertainty breeds speculation.
In this case, instead of a single opinion on the future of the currency, agents may have divergent views. Exporters may, for instance, be holding back on their receivables while importers rush to cover ahead of such an eventuality.
The short point is that the RBI may not be justified in tampering with established market systems, just to ensure that the rupee does not budge an inch. Its concerns are understandable: there is talk in the market of the government paying for large defence purchases, and the oil companies are expected to make remittances in the current week. But the government had committed itself to routing all debt service payments through the markets when it acceded to the Article IV conditions of the IMF. The current bout of mild turmoil -- if it may be called that -- surely doesn't justify the onset of a severe withdrawal syndrome.
More specifically, what has happened to justify such a response? The rupee lost almost 60 paise in the course of the Kargil affair, falling to Rs 43.30 to the dollar. In the current month, it touched a low of Rs 43.56 -- a drop of another 26 paise -- in keeping with the view that the post-war defence replenishments would add to forex demand. Additionally, with every rise in oil prices, rational agents can see the oil import bill mounting: more dollars to pay for the same volume of oil imports. To dismiss all this as mere market rumours or speculative activity shows a mindset overwhelmed by doubt if not fear.
Over the last year, the RBI has perfected the art of intervention in the markets. Last August, it had committed itself to ironing out demand-supply mismatches. That reassurance has stood the markets in good stead for the whole of the last 12 months. The RBI intervened at strategic times, but even at the height of the Kargil issue, it refrained from intervening though 10 paise intra-day movements were common. That maturity of thought and deed seems to be lacking in its reaction this time round.