The sharp fall in the value of the rupee has now become a cause of concern. Over the past one month, the rupee fell 3 per cent not far away from an all-time low against the US dollar of Rs 52.18.
The rupee has depreciated 13.5 per cent over the past 4 months. This has hurt importers by raising the cost of imports. Oil is more expensive for India by 13.5 per cent as a result of this depreciation. The sharp slide in the rupee has had an impact on corporate earnings as well. According to Kotak Securities, a Mumbai-based securities firm, unhedged positions on external commercial borrowings of Indian corporates have resulted in an erosion in profitability of Indian companies. Ranbaxy Laboratories, a large drug exporter, reported forex losses of Rs 592 crore while Bharti Airtel, the largest cellular operator, lost Rs 251 crore. Jet Airways, Tata Power, Shree Renuka Sugars are other companies that have reported losses due to the volatility in the forex markets.
Pundits are calling for an intervention to boost the rupee. In fact, in the technical advisory committee meeting of the Reserve Bank of India, an external member of the committee suggested a nominal exchange rate appreciation to reduce the cost pressure on the economy. This is according to the minutes released by the central bank on Thursday.
So far, RBI has refrained from any intervention.
The government though has other ideas.
The worry here is that the falling rupee would add to the inflation. RBI has already gone a long way in raising interest rates in its fight against inflation. It continues to take a hawkish stand. However, it cannot raise rates for ever.
On Thursday, the government made a slew of announcements that would encourage foreign flow of funds.
* The government is planning to allow Qualified Foreign Investors (QFIs) to directly buy equities in the stock market. Currently, only overseas high net worth individuals with a minimum net worth of $ 50 million and registered as a sub-account of Foreign Institutional Investors (FIIs) are allowed to directly participate in the stock market. In 2011 so far, FIIs have pulled out $ 799.8 million. The sentiment clearly does not favour Indian equities. While it may take a while before foreign individuals are allowed to buy or sell Indian shares through this route, the move would be good for the sentiment.
* The Finance Ministry also increased the investment limit for foreign institutional investors in government securities and corporate bonds by $ 5 billion each, a move that will enhance capital flows and increase the availability of resources for Indian corporates. The FIIs can now invest up to $ 15 billion in Government Securities (G-secs) and $ 20 billion in corporate bonds, official sources said.
Besides these, the government has also made some noise about allowing foreign direct investment in multi-brand retail, pension sector and domestic aviation.
However, this may not be enough to change the sentiment on the rupee. For foreigners to bring in those top dollars to prop up the rupee, perception matters.
To that end, India is making a strong pitch to upgrade its sovereign rating with major credit rating agencies. The idea is that any upgrade in the country’s rating would lower the cost of borrowing for Indian companies and also enhance the attractiveness of India from a foreign investment standpoint.
But credit rating agencies also note that the government borrowing continues to rise. On Thursday, the finance ministry approved changes in the Food Security Bill. The Bill is expected to cost Rs 1,00,000 crore to the taxpayer lifting the overall food subsidy from Rs 70,000 crore currently. Foreign investors may want to know how the Indian government plans to pay for these bills. If convinced, they may help the rupee by bringing in their top dollars.