Options before RBI for Weakening rupee

Problem: The falling rupee’s 18% decline since August has made it the worst-performing Asian currency this year. This is worrying policymakers, not least because a steady drop in the country’s foreign exchange reserves and a worsening current account deficit make it vulnerable in a tough global environment.


Extent: India’s foreign exchange reserves have fallen in recent months, dropping to a nine-month low of $304 billion on November 25. The country had repayment obligations worth more than $100 billion in the 12 months to June 2012, data released earlier this year showed. Currency strategists at HSBC and CLSA have forecast the rupee slipping another 13% from its present levels to 58 per dollar in the next few months.


Why the problem arose: 

1. The Euro zone crisis has triggered risk-aversion among investors and slowed capital inflows 
2. pressure on the economy and the currency from a slowing economy, a widening trade deficit amid high contractual repayment obligations. 
3. Dollar liquidity crunch globally in the wake of downgrades by ratings agencies of European countries and banks.

Measures Taken: The government has already taken measures to boost capital inflows. These include raising the foreign institutional investment limit in government securities and corporate debt, raising borrowing limits for banks and companies and asking companies to quickly bring back home funds raised overseas.


Measures which are being considered:

1. Imposing restrictions on overseas investments by local companies
2. curbing pre-payments of foreign loans
3. Enforcement or revision of prudential limits on currency positions
4. Strong communication to cool markets
5. Steps to curb speculation
6. Ease overseas borrowings for corporates and banks

Long term measures

1. Assess preparedness to deal with any financial crisis
2. Freeze the contours of the proposed Crisis Management Group with more clarity on its role and powers