The steep fall in the value of the rupee vis-à-vis the dollar in a short period defies rational explanation. No doubt the large size of the current account deficit is a major factor, besides the doubt about the compensating capital inflows. But what has happened in the last few days that led to the current crisis? The market knows that the Reserve Bank of India (RBI) cannot make any effective intervention since its reserves are equal to just a few days' turnover. Of the total turnover, about one-fourth only are accounted for by real transactions. The inter-bank dealings making up the rest are fly-by-night adventures of the treasury branches of banks and others. An investigation of the treasury incomes of banks in the recent period will confirm this. There was a rule in the distant past when no net-open position was allowed at any time, even during the day besides overnight. The RBI should revive it assuring the market that it would be withdrawn when there is reasonable stability in the rates. Wily operators will argue that it would affect liquidity in the market, tarnish the image of the country, generate a panic, and so on. Let it be so. Drastic situations call for drastic action.
A Seshan Mumbai
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