Several economists suggest that the government and Reserve Bank of India (RBI) should refrain from populist actions such as lowering the tax on fuel to prevent the rupee from dropping further.
The rupee is declining in the last few weeks. Prime Minister Narendra is expected to meet top civil servants, including Finance Minister Hasmukh Adhia and members of his Economic Advisory Council to review the current economic scenario on September 15th.
The Indian currency continued on Friday and won 49 paise in the opening trade. It opened higher with 71.70 per dollar versus 72.19 Wednesday.
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Economists warned the government against pressing the panic button and plaster solutions because they would only encourage currency manipulators to exploit the situation further.
However, they said the government should send a clear signal to foreign investors that despite the upcoming general elections in 2019, it will stick to the target of a 3.3 percent deficit of GDP in FY19. This can increase the confidence of foreign investors and minimize cases of volatility.
Minister of Finance Arun Jaitley, NITI Aayog Vice-President Rajiv Kumar, Prime Minister of the Economic Advisory Board (PMEAC) Chairman Bibek Debroy and Financial Secretary Hasmukh Adhia are expected to ask the RBI to intervene in the market and discuss options such as NRA bonds to propup the rupee.
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Moneycontrol had first reported that the government might consider borrowing for loans to non-resident Indian (NRI) bonds or deposits.
NRA bonds are forex deposits that have been raised for a period of 3-5 years at attractive rates from non-resident Indians, with some lock-in and an implied RBI guarantee. The government is driving these bonds to get a foreign pension and institutional funds.
RBI had earlier – 1998, 2000 and 2013 – given nod for issuing NRI bonds to arrest a sliding rupee.
Many non-resident Indians (NRAs) had in the past seized and parked cheap loans in dollars in India to benefit from the difference of 200-300 basis points between the interest rates on NRI bonds and the rate they borrowed, Pronab Sen, former chairman of the National Commission for Statistics The financial express.
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Issuing NRI bonds worth $ 30-35 billion would change investors' perception of rupees and help stabilize them. Bank of America Merrill Lynch Chief Economist Indranil Sengupta told the newspaper and added that all three issuers of NRA bonds had stopped contamination in the past.
Economists believe that the government must take immediate action to encourage exports to earn more dollars and to limit the trade and current account deficit.
Some economists argue that the depreciation of the rupee to 72-73 is far from a crisis-like situation. The decline is reportedly a natural correction as the domestic currency remained stable and overvalued for too long.
"The rupee is now a bit exaggerated, that is temporary. The government does not have to do anything special, except to limit volatility. It must stick to deficit targets and clearly indicate how the MSP program & # 39; s (crop) implements, "DK Joshi, Chief Economist at Crisil said.
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Sen added that the government must repay goods and services tax (GST), address national needs and take concrete steps to stimulate jobs.
GST reimbursements can ensure that the working capital of companies, in particular MKME & # 39; s, runs smoothly. The government must address "rural disasters" to ensure higher grain prices for farmers and create employment to help grow consumption.
"Fiscal caution, high growth and RBI dedication to keep inflation controlled and stable through the inflation target, investors must give a loud signal about India's macroeconomic stability," said Saugata Bhattacharya, Chief Economist at Axis Bank, adding that the current concerns about rising deficits in the trade balance and the current account would eventually decrease.
Many economists believe that the economy is now in much better shape than in 2013 when the rupee reached $ 68.85 against one dollar. Challenges for the future, however, are the deterioration of the current account deficit, which exerts pressure on the rupee. According to forecasts, this level of taxation could deteriorate to around 2.5 percent of GDP, mainly due to higher oil prices.
Foreign portfolio investors (FPIs), who were net net buyers of shares and debts last year with a net inflow of about $ 27 billion on December 29, also have net sellers with a net outflow of about $ 7 this year. billion to 31 August.
Forex reserves and low inflation may help the economy to address the current situation. Although foreign exchange reserves fell to $ 400.1 billion as of August 31, on suspicion of intervention by the central bank to curb rupee volatility, economists think they are still sufficient to address the current situation. Inflation, which reached a low of 10.69 percent in August, is also likely to remain within 4-5 percent.