BREAKINGVIEWS: RBI's draconian FX grab won't help weak rupee

MUMBAI Thu May 10, 2012 2:34pm IST

Indian currency of different denominations are seen in this picture illustration taken in Mumbai April 30, 2012. REUTERS/Vivek Prakash/Files

Indian currency of different denominations are seen in this picture illustration taken in Mumbai April 30, 2012.

Credit: Reuters/Vivek Prakash/Files

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MUMBAI (Reuters Breakingviews) - What's worse than a policy which scares off much needed foreign investors? A scary policy that's also ineffective. A new Indian rule requiring exporters to repatriate half their foreign currency manages to be both.

If the fear of a fast falling rupee had led Indian exporters to hoard large sums of cash in hard currencies, then the Reserve Bank of India's (RBI) move might make practical sense. But by the RBI's own estimate, this change will only bring back between $2.5 to $3 billion of capital. That's loose change in comparison with India's $185 billion annual trade deficit. To be fair to the RBI, the change will prevent exporters from building up even larger stashes of cash. Seen in that light it may be more prevention than cure.

(Read main story, RBI curbs exporter FX holdings to lift rupee, click here)

The rupee is certainly under pressure. The ballooning trade deficit means it has to run just to stand still - without steady capital inflows, the currency will collapse. And without a steady currency, it is hard to attract foreign capital. Thing keep getting worse, India's exports for the month of March fell by 5.7 on a year on year basis. The first time they have declined since 2009. The rupee suffered its biggest daily percentage fall in nearly five months against the dollar on May 9.

But constant tinkering with policy does more harm than good. Recent flip-flops over tax laws spooked portfolio investors. The rules have changed on cotton exports so often that no one can now remember if they are banned or being promoted.

If New Delhi really wants to tackle the trade deficit, gold imports are a much better place to look than industrial exports. The prime minister's economic advisory council estimated that India imported $58 billion of the metal in the year ending March 2012. But a sensible decision to tax imports of gold has been partially overturned by India's indecisive policymakers.

India needs imaginative policymaking to keep foreign investors keen and to tackle its twin trade and fiscal deficits. The latest tinkering is yet another example of counterproductive thinking.

CONTEXT NEWS

- In a move designed to stem the decline of the rupee, the Reserve Bank of India (RBI) announced that exporters will be required to sell half the foreign currency in their accounts on May 10.

- The RBI has been taking administrative measures and has also been intervening in the markets to support the rupee in recent sessions, according to dealers. It made similar moves to stem a tumble in late 2011, Reuters reported on May 10.

- Exporters will need to convert between $2.5 and $3 billion dollars into rupees from their foreign exchange accounts following the Reserve Bank of India's directive, a senior RBI official told Reuters.

- India's trade deficit for April was $13.4 billion. Annual exports fell 5.7 percent to $29 billion in March, their first fall in four months as demand weakened in the United States and Europe.

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

(Editing by Edward Hadas and David Evans)

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