Opinion: It's time for India to look again at the IMF option

RBI should add to its reserve firepower before defending the rupee

The volatility in the stock market, the continuing decline of the rupee, and rising yields in government bonds reveal investors’ lack of faith that the Indian government is in control of the situation. Confidence in the system is at a low, and it is not certain that any further statements from high government officials will help. It is not, thus, simply a matter of communication. Many in the government have already said too much with too little follow-up for that to be a real possibility. Instead, the government must recognise the possibility of such a lack of confidence that investors, domestic and foreign, just want to take their money and run — and invest it anywhere but here.

The confidence of global investors in the Indian economy has already been shaken with the Lok Sabha passing the food security Bill on Monday. The Indian rupee continues to fall and the markets remain choppy and subdued. If the land acquisition and rehabilitation Bill, in its current form, is also passed by the Lok Sabha, as is being planned, domestic investors too would lose whatever little faith they have in the government’s ability to revive investment sentiment. The government must rethink its options on such legislative initiatives if it wants to revive confidence in the Indian economy.

Even then, restoring investors’ confidence will not be easy. Where once the government had several lower-cost options to beef up its reserves, it now has very few. For one, the issue of sovereign debt bonds has become a bad idea. After all, any such issue would have to be rated — which would raise the possibility of a downgrade that would be catastrophic at this time. It is also, probably, too late for a real swap initiative with some other countries that would ease pressure on Indian reserves.

India, unfortunately, did not join the Chiang Mai Initiative, the multilateral currency swap system that includes Southeast Asian nations, China, and the Pacific Rim economies. Perhaps some relief to the rupee might be provided by pushing those public sector assets – whether banks or companies – with relatively healthy balance sheets to borrow abroad. Even so, those borrowers will have to explain to hard-nosed lenders in the rest of the world why they need dollars — and the answer, if truthful, would in any case be destabilising.

It is, thus, once again clear that the only real option is to approach the International Monetary Fund (IMF). If the Reserve Bank of India has to start using its foreign exchange reserves to defend the rupee, which it now should, prudence demands that the central bank should add to its reserve firepower.  Also, the government can hardly complain that seeking IMF funds would have severe political repercussions at home when it simultaneously has clearly implied that macroeconomic mismanagement’s political repercussions are minimal enough to allow it to push forward with the food security Bill.

It is a pity that the government did not see fit to go to the IMF earlier, when it was in a stronger position, and could have hammered out far more beneficial terms. But there is a silver lining to that. By going to the IMF now, the government will have an alibi for whatever painful structural adjustment is necessary — and it is known, surely, in the government that some such structural adjustment will have to be made. Further, the external discipline that an IMF loan provides is just the thing to restore a certain degree of confidence to battered investors. If they will not believe the government has the will to deliver, they could still respond positively to the imposition of the IMF’s conditions and a supervised adjustment programme.