CII suggests 12 ways to curb rupee volatility, control widening CAD

With the rupee diving to a fresh low of 73.77 against the US dollar this morning and Brent hitting a four-year high, whispers about an encore of the 2013 taper tantrum are getting louder. But the Confederation of Indian Industry (CII) believes the situation can still be controlled.

According to The Economic Times, the business chamber on Wednesday submitted a dozen suggestions to the Prime Minister’s Office, the finance minister and the Reserve Bank of India on curbing rupee volatility and controlling the current account deficit (CAD). It added that while some rupee depreciation was initially required, any further volatility could hurt the economy.

CII suggests 12 ways to curb rupee volatility, control widening CAD

Incentives for foreign currency non-repatriable (FCNR) accounts, non-resident Indian bonds and a special dollar window for oil companies are among the 12 measures suggested. The CII pointed out that the primary reason for the rupee’s slide against the greenback was large capital outflows due to normalisation of the US monetary policy and rise in crude prices. “It is, therefore, important to find ways to finance the CAD, which will remain under pressure as long as oil prices are climbing.”

India’s current account deficit worsened to 1.9% of GDP in FY18, from 0.6% in the previous fiscal, and is forecast to deteriorate further to 2.8% this year.

According to the CII, with the US Federal Reserve raising policy rates to 2-2.25%, the FCNR deposits need to be made more attractive – the existing interest rate of 3-3.5% on such deposits of 3 years maturity is not adequate. Hence, the body suggested higher interest rates on such deposits.”Given strong appetite among non-resident Indians (NRIs), either a bond or a special deposit could be considered,” said the CII, suggesting bonds that have been issued earlier as well. The Resurgent India Bonds of 1998 and the India Millennium Deposit scheme of 2000 raised $5 billion each.

Then, in 2013, when the rupee hit 68.84 against the dollar following the taper tantrums (a term coined to describe market volatility following the US Fed’s announcement that it would reduce its bond-buying programme), the then RBI governor Raghuram Rajan had introduced FCNR-B deposits. The scheme attracted an inflow of $32 billion and changed the course of the rupee.

Moving on to oil prices, the biggest threat to the Indian economy since we are the world’s third largest oil consumer and heavily dependent on imports to boot, the CII recommends taking the diplomatic route. The body reportedly suggested that the government should negotiate with the US to seek relaxation to work with Iran and Russia on rupee-denominated oil imports or even barter for oil.

Last month, US President Donald Trump signed an executive order that paved the way for slapping crippling sanctions on countries, foreign entities and individuals violating the Countering America’s Adversaries through Sanctions Act (CAATSA). The Act applies to Iran, India’s third largest oil supplier, as well as Russia, where India is eyeing additional investments in the energy space.The CII moreover called for measures to boost exports and make FDI attractive, mooting lower corporate tax on MNCs and suspend the cap on royalty payments for listed entities.

According to the industry body, rupee depreciation – down nearly 14% against the dollar this year so far – has led to a steady increase in the domestic retail price of fuel, made imports costlier and though exporters have benefited, cost pressures have escalated across businesses.”Consumption demand, which has been buoyant recently, may become subdued as additional cost of fuel leads to pressure on disposable incomes. This would dampen demand ahead of the festival season,” it warned, adding that the recovery in the economy could get derailed. Moreover, any further volatility can have a negative impact on the economy, create inflationary pressure and lead to a loss of confidence among foreign investors.

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