Rupee Looms Over Chidambaram-RBI Post-Budget Talks

By SIMON CAMERON-MOORE

MUMBAI: The holy grail of rupee convertibility and the dilemma of monetary growth caused by foreign exchange inflows will dominate Finance Minister P Chidambaram's meeting with India's central bankers next week.

The Reserve Bank of India's Board of Governors go to New Delhi for a traditional post-budget briefing with the Finance Minister, March 10.

"The immediate agenda would be the RBI's ForEx market intervention and market sterilization efforts," Aashish Pitale, Debt Research Manager, ICICI Securities and Finance Co. (I-Sec), the Indian affiliate of JP Morgan, said.

Some bankers estimate the RBI has bought $500 million trying to keep the rupee in check since Chidambaram announced a pro-business, pro-growth budget, February 28.

"The RBI already has a problem stopping the rupee from appreciating, and it is also overvalued," said a currency analyst for a foreign fund in Mumbai. "It is the biggest problem to sort out."

Analysts do not expect any new policy to be announced. But the RBI needs clues from Chidambaram about what level of inflows to expect in order to gear its intervention accordingly, Pitale said.

"The RBI has bought forward dollars across maturities," Pitale said, adding "The policy seems to be one of creating dollar demand over the next six months, leading to a gradual depreciation of the rupee."

One way of braking dollar inflows without discouraging foreign investment could be by tightening banks' cash reserve ratio (CRR) specifically for expatriate deposits, he said.

He also said there could be some discussion on the removal of the CRR on interbank liabilities. The central bank is due to make its next six-monthly credit policy statement in April.

The confident ambitions for convertibility, and the problems thrown up by the battle to hold down a rupee itching to move higher, will cast those talks in stark contrast to the mood a year ago when the rupee needed rescuing from a free fall.

The rupee has been stable between 35-36 to the dollar for the last nine months after a torrid start to 1996.

The RBI has set up a committee to map out conditions needed for covertibility, which is due to submit a report by end of May. The RBI's Chief General Manager PK Biswas, according to a report by the Business Standard newspaper, March 14, suggested it would happen no earlier than the end of the century.

One of the foremost conditions for convertibility is steering India's inflation rate down to levels prevailing for major international currencies.

The wholesale price index annual inflation rate, hovering close to eight percent, is bothersome, analysts said.

The RBI has room to lower the CRR, loosening credit from a banking viewpoint, but not on macroeconomic grounds, R Balakrishnan, President of brokerage firm Dil Vikas Finance, said.

The central bank needs to create a credit environment conducive to increased lending to the corporate sector, while not loosening credit so much that a 16 percent annual M3 monetary growth rate target is overshot.

"I expect the RBI governor to assure the finance minister that money supply growth will not be throttled and will be adequate to meet demand from industry," Vasan Sridharan, analyst at JM Share & Stockbrokers, said.

The RBI's predicament is complicated by heavy currency inflows on the capital account which have necessitated central bank dollar buying to stop the rupee appreciating.

RBI Governor C Rangarajan also said this week future currency intervention will be constrained by the need to keep within the M3 growth target. (Reuter)

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