In dribs and drabs

The measures announced by the Reserve Bank of India and the government to shore up the rupee were too little in view of expectations, and too late in view of the drift and damage which has already taken place.

Both the prime minister and the finance minister, whose last day in office was Monday when the announcement was made, had raised expectations by announcing that important reform measures would be taken very soon. If these were the measures they meant, they would not make much of a difference. In fact, they would do damage also because they have given the impression that the government is still not thinking of measures that are really needed. Strictly speaking, Monday’s steps were not even related to policy. They had more to do with procedure.

The new regulations allow companies with foreign exchange earnings to borrow in dollars to cover rupee loans, upto a ceiling of $ 10 billion, with certain conditions. The cap on foreign investment in government bonds has been increased from $ 15 billion to $ 20 billion. More types of foreign investors have been made eligible to invest in government securities and some incentives have been announced for investment in infrastructure mutual funds. But there was scope to raise the cap on government securities further. Even if it is true that some capital flows may be attracted by the measures, they will be only portfolio investments which are not stable. The attempt should have been to attract the more reliable foreign direct investment (FDI) inflows which will increase production, provide employment and create more investible capital. There is a high level of risk aversion among investors and so India may not be a preferred destination, in spite of the relaxation of limits. This year’s current account deficit is projected to be around $ 70 billion. Even if there is an increased inflow of capital, there will still be a gaping hole  which will have to be financed.

So it is not surprising that the markets were not impressed by the measures and the stock indices and the rupee went down after the announcement, after surging in expectation. There is a price to be paid for failing expectations also. That is in the form of loss of hope and confidence. When that happens, it becomes still more difficult to salvage the situation.