The recent free fall of the rupee, the shrinking currency reserve (forex) and a possible balance of payments deficit (BoP) in the current fiscal year, economists wonder whether the government and the Reserve Bank of India (RBI) might look like a swap deal on FCNR (B) – foreign currency (bank) – deposits to stabilize the Indian rupee against the dollar.
The RBI had announced a similar measure in 2013 when it opened a window on the banks to exchange new FCNR dollar deposits in order to stop the steep dive in the Rupee.
This year, the rupee slipped more than 8% and hit 70.15 against the dollar last week. At the same time, the currency reserve has dropped by $ 25.15 billion to $ 400.88 billion compared to the peak of $ 426.02 in April. Another worrying macro-data published by the government last week was that of the trade deficit, which grew by 18 billion dollars in July and now stands at 8.1% of GDP.
A report by the financial services provider Nomura predicts India's current account deficit (CAD) to drown this fiscal budget to 2.8% of GDP as a result of higher global oil prices, depreciating rupees and portfolio outflows investments. Swiss investment bank Credit Suisse has also predicted that net capital inflow will be $ 55 billion lower than the planned CAD of $ 75 billion this fiscal year.
As all these adverse events come together, Devendra Pant, chief economist and senior director (public finance), India Ratings and Research (Fitch Group), provides for the need to mobilize foreign currency investors to decrease the rupee's value against the dollar to control this tax.
"Capital inflows or portfolio investments have not been that strong and the current account deficit has increased, which may lead to a deficit in the balance of payments. We believe that the government and the RBI will go together for NRA Deposits, slightly similar to 2013, to $ 25 billion to stabilize this budget the rupee, "he said.
Pant said the $ 25 billion FCNR (B) deposit could stabilize the Indian rupee with an average of around $ 68.40 per dollar, otherwise it could just scale to higher levels.
"T The moment you make the FCNR (B) of $ 25 billion (B), you may see that the balance of the balance of payments balance is higher than your current account," he said.
The estimate of the India Ratings and Research economist is based on a CAD of 2.6% of GDP or $ 71 billion. Pant calculates that at that CAD level the trade deficit would be somewhere around $ 19.5 billion or 7.3% of GDP. And with an inflow of capital or negative, the BoP can end up in the deficit zone.
"Foreign portfolio investment (FPI) was negative, the FPI investment only recovered in July, but there is already a gap in the FDI, but it is not that it will be able to Higher trade deficit due to oil prices. "Today the government has come out with the estimates that import costs are $ 26 billion higher. estimate of that is from $ 23 billion to $ 30 billion, so this year we are looking at a historically high trade deficit, "he said.
The trade deficit was $ 13 billion or 6.3% of GDP last In 2012-13 it had risen to 10.5% of GDP, causing the rupee to fall to a low point.
DK Srivastava, senior policy advisor, EY India, said a deficit in the balance of payments may are expected in the current tax situation and a mobilization of funds by means of currency commitments must be initiated periodically to prevent the volatility of the currency.
"That (BoP deficit in the current fiscal year) is to be expected , and we must try to attract investable funds on a foreign exchange basis through all the schemes we can and use for infrastructure and other investments, "he said.
Rishi Shah, economist, Center for Digital Economy and Policy, is also believes that the current fiscal deficit may show a BoP, but said that he would like to wait longer before we make an authoritative commentary on it.
"We can have a year in which the total BoP falls short, but it is still too early to say anything about it, because there is still a very large part of the year that you have to go through." Let's see how the global global economy, "he said.
EY & # 39; s Srivastava saw the drying up of currency reserves as a temporary phenomenon; "Once all these rate actions and reactions have been resolved, most of these things will come to rest." My view is the economy that maintains a better macro economy, including budget deficit, inflation profile and CAD. "Our CAD on a sustainable level would be about 2.4- 2.5% Inflation (rises) only seasonal influences, but is under control In the area of the budget deficit there is a slight derailment but it is not an exaggeration compared to other emerging market economies. "
Shah said only if India were to lose. another $ 20 billion from his forex reserve, it would be a concern.
According to him, based on an average import of $ 40 billion per month, the current $ 400.88 billion forex reserve gave a coverage of 10 months.
"Generally when you have more than a year of reserves, it is a good position to be in. But 10 months of import coverage is also comfortable.This is a rough measure, you always export something. Near the 8th month's import covers most of the time and we are now in a better position, "said Shah.
The EY economist also sees rupees at 70 levels not as a major concern, because it was expected to fall at that level and then stabilize. According to him, inflation in India was higher than inflation in the US, but the rupee had to write off against the dollar
. "(Rupee) should have fallen in value that way (but in the past it started to appreciate) So I think 70 is considered a normal level, given the different inflation (between India and the US), but beyond that , it would be a concern, "Srivastava said.