Wednesday, December 21, 2011

Que Sera, Sera

Rupee touched an all time low of 54.30 last week and looked set to continue its downward spiral. Thanks to RBI's (extreme) measures, rupee has had a (temporary) recovery / halt.  In it's recent directive, RBI has dramatically reduced trading limits for banks and corporates and pushed us back to very restrictive currency trading era.  To highlight changes:

(1) USD / INR forwards booked by residents, once cancelled, can't be re booked
(2) Past performance limit is now reduced to 25% of last three years' average or last year's import/export (whichever is higher) and all forwards booked under this facility will be on a deliverable basis.  No exchange gain will be passed on if such contract is cancelled.
(3) All short tenor contracts (cash / tom / spot) by banks will strictly be on deliverable basis.
(4) FIIs will not be allowed to re-book cancelled contracts.  However rollover will be permitted.
(5) NOOPL (Net Overnight Open Position Limit) of all banks has been reduced across the board.  Banks have been directed to ensure that intra-day and daylight open positions are within the approved NOOPL.

As expected, there has been a significant reduction in trading volume.  For now, it looks like RBI has the house in order.
However, it is another story that shallow markets will prove to be less efficient and more volatile.  Some of   the most likely implications:

  • Companies with genuine hedging needs will be constrained.  Risk management, anyone?
  • Offshore markets likely to see more flows as onshore sees more restriction.  Is there an approach to control NDF's impact on onshore market and is there way to control NDF market in itself?
  • Curbs not only speculation also liquidity and would increase volatility in the medium to long term.  
In my mind, these measures could do more harm than help, in long run.  

In another move, RBI lifted the cap on interest rates paid by local banks on foreign currency deposits of NRIs.  There has been easing of ECB norms by allowing Micro Finance Institutions (MFIs) and NGOs to access foreign currency loans.  While these measures are aimed at attracting foreign currency flow, how significant and immediate the impact would be, is questionable.  RBI is also said to be toying with the idea of significantly pushing up the cap on all-in cost of overseas borrowing by corporates and also allow companies to borrow more through the ECB route.  

All this is ok but not enough.  Global issues, our own fiscal and economic mess, record debt coming up for repayment (almost double as 5-yr average) in 2012, fleeing foreign investments etc., will continue to weigh on rupee, and our central bank can only do so much.  

It's more to do with Government's behaving like a rabbit caught in the headlight and complete lack of sensible policy measures.  Action - long overdue please!

"Que sera, sera
Whatever will be, will be
The future's not ours, to see
Que sera, sera
what will be, will be...."

sad, but seems like our plight, at least for now.

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