India’s current efforts to save the falling rupee may be too little, too late

Roller coaster ride.
Roller coaster ride.
Image: AP Photo/Aijaz Rahi
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India’s decided that it can’t remain a passive spectator while its currency slides to unseen levels.

Till a few weeks ago, the government didn’t think there was anything to worry about in the rupee’s steep fall. However, that stance itself spooked the currency further. It didn’t take long after the rupee breached the psychologically crucial 70-to-a-dollar mark about a month ago for it to test the Rs73 level.

In 2018, the rupee has already lost over 11% of its value against the greenback, making it one of Asia’s worst-performing currencies. Among reasons for this slide are higher crude oil prices and India’s widening current account deficit. Other emerging market currencies, too, have been falling, piling pressure on the rupee. The US’s trade wars with China and Turkey haven’t helped either.

So now the government has announced a slew of measures to support the rupee after prime minister Narendra Modi held an economic review meeting with officials of the finance ministry and the Reserve Bank of India (RBI) on Sept. 14.

Government measures

To begin with, the rules for external commercial borrowings (ECBs)—or foreign-currency loans raised from overseas lendershave been eased for manufacturing companies. With this, the government aims to improve the dollar inflow into the economy.

Then, rules have also been relaxed for masala bonds—financial instruments used by Indian firms to raise overseas debt in rupees, rather than in foreign currency. Such easing of restrictions may make these bonds attractive and boost long-term inflows.

The mandatory hedging required by infrastructure firms for ECBs has also been removed. So the demand for dollars could weaken, reducing the pressure on the rupee. The government is also mulling lesser imports of non-essential items and boosting exports.

Will it help?

If Monday’s trade is anything to go by, the government measures announced over the weekend have done little to comfort the market. Today (Sept. 17), the rupee opened lower and was trading over 72 a dollar, continuing its losing streak.

Economists believe the steps are likely to have a limited short-term impact. In fact, HDFC Bank, the country’s largest private sector lender, believes they may even turn out to be negative in the long run.

“Considering that most of the measures aim at increasing short-term external debt, in effect it could worsen the risk profile of companies (by increasing unhedged exposure), and this can actually be considered negative,” said Abheek Barua, chief economist at HDFC Bank, in a report released on Sept. 15. The rise in short-term ECBs or foreign institutional investor exposure can also lead to further worsening of companies’ vulnerability ratios and global investors might take this negatively, added Barua.

Other economists also believe the government’s rescue efforts will only have a sentimental impact on the rupee, as global macroeconomic factors may continue to weigh on.