...Hitting The Currency Pain Barrier
As the country moves toward capital account convertibility the Reserve Bank of India (RBI) must decide whether it can pay the price of a rampant rupee.
The RBI bought around $5.0 billion in 1996-97 ended March 31 and around $2.0 billion in the first two months of this fiscal to try and halt the rupee surfing higher on a wave of foreign capital inflows.
But bigger waves are on the horizon as India moves further toward convertibility, and managing the consequent increase in broad money supply will become an acute problem, analysts said. The big danger is on the rupee. Already we are seeing more and more pressure on it. The RBI has to make a big policy decision on what kind of currency it wants, said Nupur Joshi, economist at Jardine Fleming (India) Broking Ltd. Exporters have already hit the pain barrier.
The rate of export growth in April went into fast reverse, clocking a negative 10.8 per cent compared with a positive 13.7 per cent in April last year, according to data from the FIEO. Exporters say the trend began in 1996-97 when export growth slumped to 4 per cent from 21.4 % the year before. S Asian neighbours currencies have all fallen against the dollarlast year, to add to exporters woes.
India is losing market share for high value basmati rice to Pakistan, tea to Sri Lanka, and jute and garments to Bangladesh, warned a banker. The Pakistan rupee has fallen around 15% against the dollar over the past 12 months, and the Sri Lankan rupee is down 5.5 per cent on a year ago.
Meantime the rupee has stayed stubbornly strong against a dollar which has surged against other international currencies, making its trade weighted performance stronger. The rupee was trading at around 35.82 to the dollar on Thursday, virtually unchanged from a year ago.
Lack of diversity in the export sector increased the vulnerability of the trade performance. Anindya Chatterjee, economist at NatWest Markets in Mumbai, said official expectations of 15-20% growth in exports this f iscal were overblown. Exports, which are non-oil and non-electronics are not going to grow by more than eight per cent in 1997/98, Chatterjee said. At the same time imports will head higher. That spells hard work lowering Indias debt service ratio from 25 per cent to 20 per cent, after successfully whittling it down from 35 per cent when it embarked on its liberalisation programme in 1991.
Aggressive central bank intervention has helped build forex reserves to their highest levels ever, at $28.22 bn in early June compared to $21.62 bn a year ago. The RBI has to face a stark choice on whether to let the rupee firm, when its strength is already damaging exports, or miss its monetary target of 15.0-15.5 per cent for M3. Data for late May showed M3 growing at 16.4 per cent.