3:07 pm - Tuesday October 24, 2017

Hot Money and Hungry Reserve Bank: By Biswajit Behera

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Hot Money and Hungry Reserve Bank:

Rupee is going to celebrate its first senior citizen anniversary on 23rd August. Last year this month rupee accorded senior citizen status first time ever in history.After one year our currency maintains its same status quo and trading at 62 levels. Once again rupee depreciation sparks near panic in 2013.

The direction in which our currency is headed perhaps the biggest talking point in economics today. Indian rupee is not in the best health and it’s again and again falling down against the US dollar. The currently appreciating rupee will not only create problems for Reserve Bank of India (RBI) Governor but also can be reason for new crisis.

We have seen how RBI running from pillar to post to stabilize the rupee’s value by introducing measures such as currency swap concessions for banks raising money from abroad, a special dollar window to state oil companies higher import duties on gold, restricting of overseas spending limit of individuals and disallowing rebooking of cancelled forward contracts.

No doubt, above measures by Mr. Rajan brought sudden inflow of dollars into the country’s equities and debt market but simultaneously raise fear and uncertainty.

FIIs net inflows touched nearly $151 billion (Rs 7, 12,974 crore), since their entry into Indian capital markets in 1992-93, according to the Securities and Exchange Board of India. Since 2012, the foreign investors have poured in about a third or $48.87 billion (Rs 2, 68,052 crore) of their total net investments in Indian equities. Since 2012, the foreign investors have poured in about a third or $48.87 billion (Rs 2, 68,052 crore) of their total net investments in Indian equities.

The rising capital inflows also build up asset bubbles in areas like real estate, housing, stock market etc. The huge inflows create a sudden demand for assets whereas supply takes times to match. This is something we saw in the period of 2003 to 2008 when stock soared from a level of 5000 points to 22, 000. Later, what followed is the history.

A rising capital inflow fuels inflationary pressure. This happens because RBI has to convert (or pay) for every dollar that comes into India into rupee resources. The money supply increases as inflows rise. So higher the money supply, the chances of inflation getting further fillip is not ruled out.

Yes, emerging economy like India needs capital inflows to bridge its current account deficits and also maintain a health foreign exchange reserves, but if they attract more inflows than they can absorb, it impacts the economy severely. Since they are hot money (inflows), the money also goes away as fast it comes.

On the other hand, India’s corporate sector, which sits on a huge pile of foreign currency debt, is under threat as the rupee’s downward spiral exacerbates the debt burden of companies already battling feeble growth and sluggish demand. I worry about cash flows for Indian corporate, particularly in the infrastructure sectors, real estate sectors where you have huge amounts of debt sitting on company balance sheets.Unlike say the economic crisis of 1991, when sovereign debt accounted for a major chunk of India’s external debt, this time it is corporate debt that is the major contributor to India’s indebtedness. We can’t ignore corporate borrowing binge can put India at risk.

Due to hot money flow our forex reserve rose to $320 billion but may not necessary adequate foreign reserves will protect our currency .India’s foreign exchange reserves have swelled in recent months to near record high, but the country is nowhere near the comfort level of feb-2008 prior to global meltdown when it was in a position to finance imports of about 15 months compared with just over eight months at present. In the current situation where there are so many uncertainties like global turmoil, Fed fund rate hike, no amount of reserves is high.

The stock market is climbing and the prices of high end real estate are rising as well, and so the rich are feeling better. But the “man on the street” isn’t feeling better. For dollar hungry Reserve bank today’s need is fulfilled, but what about tomorrow?”

Disclosure: The views expressed here in this article are for general information and reading purpose only.The article has been prepared on the basis of publicly available information and other sources believed to be reliable.

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