The only way out

The Reserve Bank of India (RBI) and the government have painted all of us into a terrified corner as the draconian measures they have been announcing almost daily have failed to halt the continuing traumatic collapse of the rupee. The collateral damage in the bond and equity markets is there for all to see.

While there may be a sense of bravado behind these desperate measures - we will hold the current account deficit to such and such level - it is patently obvious to anyone that the speculators that the regulators have been pursing with such fury are nowhere to be found. Indeed, the entire approach of pursuing speculators is being shown up for what it is - a feeble attempt to transfer the blame for failed policy making over the past several years.

Speculators, far from being swashbuckling buccaneers (notwithstanding the stylistic preferences of George Soros or Steve Cohen or Raj Rajaratnam), are actually supremely conservative, as becomes people who manage large sums of money - their own or other people's. They would never put a penny (or dollar, as the case may be) down unless they were doubly - indeed, multiply - sure that their "bet" had a substantial chance of success. These bets are sometimes insured by insider information, sometimes by simple, solid economic logic, the latter being the case in India today.

In fact, the recent actions have doubly confirmed to investors (a more polite word for speculators) that their bets were correct and the rupee can go nowhere but down. Thus, when - and it has to be when, not if - the RBI lifts some of its terrifying constraints on the market, the rupee will whoosh lower at a pace that will startle all of us.

Unless, of course, the government and the RBI recognise that there is a way out - the only way out that I can see. Even better, it is remarkably simple, easy to implement and, best of all, will have an immediate impact on the rupee's debauched weakness.

The finance minister and the RBI governor should jointly - and immediately - approach the trustees of Tirupati Trust Foundation. Three of these are state government appointees, and, given the current political dispensation, this is a distinct advantage. They should, of course, offer prayers and an opportunity for the already hugely rich trust to make significant additional amounts of money.

While there are no definitive statistics available, I believe the Tirupati Trust Foundation has well over 1,000 tonnes of gold. The number I was actually told was 1,700 tonnes, which is about five per cent of all the gold held in India (between 30,000 and 35,000 tonnes). To get really excited, multiply that total amount of gold by $48.5 million (the value of a tonne of gold at $1,350 an ounce) which comes to between $1.5 trillion and 1.7 trillion - that's right, trillion.

These, by the way, are assets - it is money we Indians own. And, given that they are foreign currency assets, it is hard to understand why we have a foreign exchange problem.

The finance minister and the governor should offer the Tirupati trustees annual earnings of, say, Rs 3,000 crore (two per cent interest on 500 tonnes of gold) plus savings of the cost of storage of the gold, which, itself could be a significant amount. And, of course, that the gold would be safe with, say, State Bank of India (SBI) and that it can be retrieved at one day's notice. It's hard to see how any trustee could turn this down.

On the market side, SBI could hold part of the gold hoard - even as much as 40 per cent - to support any sudden withdrawal, although the beauty of starting with religious trusts is that they don't need to ever withdraw the gold. The balance - 60 per cent, or 300 tonnes - can be sold in the domestic market, with the price risk on the sold gold hedged off-shore (at a cost of around one per cent a year). SBI would get about Rs 85,000 crore (300 tonnes at $48.5 million a tonne) at a modest cost of two to three per cent, which it could deploy in lending or, till demand picks up, in government securities. And, critically, gold import demand would collapse, taking the current account deficit down with it.

The plan should be announced as soon as it is finalised - and I see no reason why that should take more than a few days. The RBI and the government should then expand the plan to other religious trusts and, ultimately, to individual gold holders. In parallel, they can unwind some of the egregious constraints they have put on the market.

Immediately, upon announcement, the global gold price will fall sharply and the rupee will strengthen to better than 60 to the dollar.

Come, let us pray!

jamal@mecklai.com