New Delhi: From March last year when the unified exchange rate was announced by the government the RBI has been intervening in the Forex market (0 prop up the dollar in the face of substantial inflow and low demand from importers through such intervention. It has been able to maintain the dollar-rupee exchange sate at around R8.31.37 a dollar till about October-November Since then however the buying state for dollars offered by authorized foreign exchange dealers has slipped and is now at around Rs30.85. At the same time the selling price for dollars is the rate at which authorized dealers are selling to importers is Rs.3185. reflecting the cost of holding the dollars for a longer period of time.
Since the premium on the dollar was expected to be a major incentive for the exporters. The finance ministry is worried that unless the dollar strengthens against the rupee the exporting community would need another package of incentives to keep up the high growth rate
Lower interest rates and other incentives are already being sought by exporters and such demands #re expected to grow stronger as the budget presentation approaches
Another factor causing concern to the finance ministry is the fact that RBI’s forced intervention in the market to buying dollars is resulting in release of rupee funds into the market and adding to inflationary pressures in the economy. Therefore unless RBI is able 10 offload some of its dollar holdings and retrieve the rupees from the market the inflationary trend could get out of hand.
It is against this background that there is expectation that the government may announce full convertibility of the rupee on the current account along with the next budget While the exact modalities will be known only at the time of the official announcement the possibilities that there could be casing o restrictions an some current account transactions such as travel and fc educational purposes and stomacher specified transactions. The basic idea behind the move would be to spur the demand for dollars. ‘The Bombay stock exchange authorities for instance have already estimated that the Foreign Institutional Investors (FLLS) alone might bring the over 2.5 billion dollars within the next few months.
In addition to this the substantial foreign direct investment which has been approved during the last two and a half years will materialize into actual inflows in the coming months adding to the Forex reserves of the government.
Article extracted from this publication >> January 28, 1994
