The Rupee Needs Shock Therapy, Not Homoeopathy Or Half-Hearted Action

The Reserve Bank of India’s (RBI) decision to allow India’s oil refining companies to raise $10 billion overseas in order to cool the pressure on the rupee, which hit Rs 73 to the US dollar yesterday (3 October) and could weaken further, is unlikely to work too well.

Trying to deal with the rupee’s free fall over the last few months by raising foreign investment limits in debt one day, raising import duties on “non-essential items” on another, exempting masala bonds from withholding tax a few months down the line, and sporadically intervening in the forex market now and then, is suboptimal and underwhelming in terms of market impact.

When action comes in bits and pieces, it is like trying to cure cancer with saline doses. Just as the proverbial frog, sitting in a tub of water that is being heated a little bit at a time, fails to jump out to save itself until it is too late, trying to deal with a weakening rupee one small measure at a time means the damage will be more than it needs to be.

When the rupee’s fall (around 13 per cent in 2018 so far) exceeds the limits of normal correction driven by fundamentals, you have got to throw all you have got at the problem, not try a little bit of this and a little bit of that. If the market gets the impression that the measures to put a floor under the rupee’s slide are half-hearted, it will be more inclined to make one-way speculative bets on the direction of the currency and make things worse.

It is clear that there are rational reasons (the rising oil bill, weak export growth, etc) for the rupee to head south, but the correction is going too deep and the rate of descent can do damage to the real economy. With oil prices rising strongly, and with winter coming up, a continuing fall in the rupee will force faster increases in pump prices, pressuring personal and corporate costs.

It’s no longer about the rupee being allowed to find its own level due to past over-valuation; the market is being moved by speculative and psychological factors that are impossible to corral without bringing out the big guns.

It is time for a massive $50 billion scheme for bringing in non-resident dollars, or schemes of the same magnitude. Such schemes have worked every time in the past, including the one unleashed by Raghuram Rajan in 2013, and there is no reason why they should not work this time too.

Finance Minister Arun Jaitley and RBI Governor Urjit Patel must get a move on. The only way to avoid further panic among importers is to hit the forex market on the head and bring it to its senses with a larger-than-expected capital inflow.