Future Shocks: Indian Rupee in 2010

Most of us might have forgotten what are the recommendations of the Tarapore Committee, which was headed by Tarapore, the then Deputy Governor of Reserve Bank of India (I had the opportunity to hear him speak on one occasion and must say, he is a great thinker). The committee recommended a roadmap for Capital Account Convertibility in three years (by 2000).

Most of its recommendations have been put in place, though belatedly. Inflation is within 3.5% as targeted. Gross NPAs (Non-Performing Assets) of the public sector banks have been drastically brought down (though credit should go to the 'new generation' private sector banks, who brought in the best from their public sector counterparts, by sheer competition). There has been phased liberalisation of capital controls. So on and so forth. But still our currency is not fully convertible.

What are the reasons for such a policy decision? Initially, the fear was that the Indian rupee would weaken, as there could be capital flight from the country. There was talk all around of possible hit the national pride would take, along with the rupee slide. A certain political party observed in the Times of India : “... It will also increase the risks of a currency crisis, since along with non-residents like the FIIs, Indian residents would also be able to take large amounts of money out of the economy without any restrictions.” But to everybody's surprise no such thing has happened.

The RBI, by (very) prudent policies as well as immaculate foresight saw to it that there isn't any capital flight. So much so that, our worry now was that the rupee is getting stronger, and not weaker as feared.

Well, what is my purpose in this prelude? Each policy maker has his own logic in pursuing a certain line of thinking, more so in the finance sector. It's foolish to doubt the sincerity of any finance minister, insofar as the policies framed by them are, to their best of thinking, for the good of the country. But, it's also critical that there is continuity in approaches, a convergence in thoughts, a will to achieve a common goal, come what may.

It is one thing to appoint a learned committee, and it's another not to follow the roadmap. At the moment, even the layman knows, with the India growth story going strong for last so many years, the inflows to the country's capital markets have been tremendous. And he knows that these inflows are being absorbed by the RBI to arrest the rise in the Indian rupee. In the process, the country's foreign exchange reserves are ballooning. The policy makers are wary of spending a large chunk of it on infrastructure development, lest the FIIs, who are the major players, withdraw from the market.

But how long this will continue? Is this our policy to sterilise the flows to stem the rise in rupee? See the other side of the story. The US dollar is getting beaten in the markets due to factors gone out of control of the federal reserve. The picture on the sub-prime is still not clear. Are we done? Are more to follow? How many billions more will now be written off? Does anybody know? I think, and most would agree with me, the worst is yet to come. Where does that take us, in India? Do we really see sub-39 in the Indian rupee?

There are two scenarios. One, overseas investors, who have funds crunch, would have no money to invest in the emerging markets. In which case, fewer flows would be there. But here, the domestic investors' involvement will see to it that the stock markets are not affected; though, there may not be any cause for rupee appreciation, other than through genuine 'market-related' movements. In the second scenario, the foreign investors who still would have survived the impending US recession would be too willing to continue their presence in markets like India.

In the first case, we abandon our view of higher rupee, but stick to a steady rupee; and definitely not a weaker one. In the second case, we vehemently stick to the higher rupee if you want to predict in round 5s 35 to a dollar. In the early 90s, when the greenback was being shunned by all and sundry, there appeared a cartoon in a German daily, where a beggar says to the person giving him a one-dollar coin 'bitte, keine dollar' meaning 'no dollars, please'. I think we might see the same scene sometime in 2/3 years. Shall we put it, by 2010? Between 30-35 to a dollar? Go long rupee.
As a fall-out of the so-called 'licence-permit' raj, the per capita level of corruption, fraud, cheating etc was outnumbering the genuine transactions by the genuine stake-holders in various spheres of economic activity. The PTB's (Powers-That-Be) were, quite understandably, suspicious of anybody coming in for any approval/permission. Then as we slowly got into the phase, where the post-independent born started taking junior positions in the government and elsewhere, fresh thinking started to seep the corridors of power.

The Indian bureaucrats were exposed to the outside world through various postings in UN and other agencies. I would call this the precursor of liberalisation. To cut the story short, whenever there were new ideas thrown in by well-intentioned people, it was initially either rejected, or viewed with apprehension, if not suspicion. We have, however, seen waves of technology-driven tools being introduced in various financial markets, in tune with those in advanced countries.

In some cases, the Indians were way ahead of their European/American counterparts. Does anyone know that State Bank of India, Singapore and Frankfurt branches introduced Reuters Deal Matching platform, much before most of the European banks did?

Let's talk of a new (new, in the Indian context) concept. If you visit any site which has some relation with currency markets, you would observe, the site offers a platform for trading in currencies. It assumes that the individual can trade in currencies at market (interbank) rate; and that these traders have been individually assessed and limits given to them. While individuals, in India, can trade in the stock market, buying/selling even one share of a company, and at, what is more important, a rate which is market-related and real-time; one does not understand the logic behind not allowing the individuals to trade in currencies.

The argument about the complexity of the currency market does not hold water, when you view this against the Indian stock markets where till now none of the forecasts has come good; how does one otherwise explain the move from 10000 to 20000 in hardly any time? Put two and two. Let's have proper trading platforms available for individuals. Let's allow them to trade in currencies.