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Economy May 17, 2012

Rescuing the rupee: What RBI can do next

By Firstbiz Staff

It was a Bloody Wednesday for the financial markets. While the Sensex breached the 16,000 mark closing at 16,030, its lowest close since January 9 this year, the rupee breached its earlier all-time low and tumbled to 54.56 before closing at 54.50 against the dollar.

There was much speculation that the Reserve Bank of India intervened in the currency markets at intervals to prevent a free fall in the rupee. To be honest, the RBI has done quite a bit already over the past few months. Most recently, it directed exporters to convert half of their foreign exchange earnings into rupees.

In a special report, Deutsche Bank notes that the rupee has lost about 3 percent this month, which is in line with the fall in the value of of some other regional currencies, and even lower than some other emerging market currencies. Thank the RBI for that because were it not for a slew of central bank measures, the rupee would have fallen even further.

RBI could open a separate window for payment of oil imports, which is the biggest demand for foreign exchange.

Is there anything more the RBI can do? Yes, says the brokerage, noting that there are three further steps the central bank can take.

One, the RBI could open a separate window for payment of oil imports, which is the biggest demand for foreign exchange. Oil imports account for one-third of India's total imports. Providing dollars directly to oil importers through a separate central bankwindow would substantially reduce pressure from the currency market, says the brokerage. It recommends shifting at least part of the nearly $12 billion worth of monthly demand for foreign exchange for crude oil purchases. "RBI's reserves are sufficient to continue this practice for a prolonged period," Deutsche Bank says in its report.

Two, the RBI/government could issue a hard currency bond for Indians living abroad. India has a large diaspora and the government could announce the issuance of a Diaspora bond, perhaps with a three to five year maturity. "We can see such an issuance being successful provided the fiscal authorities begin taking some credible steps toward consolidation," the report says.

Three,the brokerage believes some additional measures like directing exporters to repatriate most of their foreign currency earnings could also be taken. There could be restrictions on futures market transactions (other than trade-related), and measures to discourage imports (especially non?capital goods) as well.

by Firstbiz Staff

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