By- M K Venu The Rupee Conundrum Managing the rupee’s exchange rate has become somewhat tricky in times of excess liquidity. Global recession has prompted monetary authorities across the developed and developing world to cut interest rates and provide more liquidity in the banking system to kickstart growth.
The objective of the monetary authorities is to see government bond yields go down as much as possible, signalling softer interest rates. More liquidity and soft interest rates, the monetary authorities hope, will also depreciate the currency and help the exporting industry become more competitive in the international market. Sounds perfectly logical. But India is experiencing something different altogether. True, interest rates are down and 10-year government bond yields are at their lowest ever -- about 8 per cent. Strangely, this is accompanied by the rupee appreciating to its three-month high of Rs.47.80, against the dollar. This is a paradox that needs to be explained. There is even more upward pressure on the rupee as oil prices soften to new lows and foreign portfolio investment into India continues to be steady. Since the Indian foreign exchange market is quite thin, any excess dollar supply in the system causes the rupee to appreciate, especially when the current account deficit is expected to remain as low as about 1 per cent of GDP at the end of 2001-02. We will most likely end up with a Balance of Payment surplus in the current fiscal and this is reflecting in the upward pressure on the rupee’s exchange rate. Under these circumstances, what happens to the hapless Indian exporter, who is getting priced off the international market? Exports are barely growing at 1.5 per cent this year. The only way out for the exporter is perhaps to cut costs by increasing productive efficiency so as to retain his margins. One suggestion to help the exporter become more competitive is to sharply cut interest rates on export finance by about 200 basis points. Cheap finance is being provided by all developed economies to lift the industry from a recessionary mode. Infact, some intrepid US economists have even suggested that interest rates be brought down to near zero levels in this extraordinary situation. Can the RBI afford to deliver a similar booster dose in the Indian context? Is the Indian financial system, such as it is, capable of managing such drastic cuts in interest rates? These are imponderables that dog our policy makers. VSNL Divestment: Cutting the nose to spite one’s face There are some things that happen only in India. For instance ministers, who administer the sale of a government company showing little or no confidence publicly in regard to getting any value out of the assets. If the seller himself shows a marked lack of confidence, you can then imagine how a prospective buyer will treat you? That is plain common sense, isn’t it? Unless, of course, the seller has some other motive altogether! The classic case in point is that of Videsh Sanchar Nigam Ltd(VSNL), the hitherto monopoly international voice carrier owned by the government. The Disinvestment Minister Arun Shourie has called for bids to sell VSNL but strangely asserts at every public forum that the company did not diversify enough to create greater value! What signal does this pronouncement send to a potential bidder. Shourie may be partly right in claiming loss of value for VSNL. The government voluntarily decided to advance the schedule for removing VSNL’s monopoly by two years ahead of our commitment at the WTO. This itself led to the VSNL’s share price falling by over 70 per cent in the last two years. But the point being made is that there is no use of Arun Shourie talking about the negative aspects of VSNL ahead of selling it. Instead, Shourie would do better by talking about the positives of VSNL, even after its long distance monopoly is done away with. For instance, VSNL has agreements with over 100 countries for revenue sharing over voice traffic. Any new private player that acquires VSNL has to merely modify the agreement to retain the partnership. The groundwork is already there. VSNL has over 30 earth stations and microwave gateways strategically located in India. It has an exclusive arrangement with FLAG, one of the biggest under sea cable provider. It has equity partnerships in many under sea landing stations in India, besides having a stake in under sea cable infrastructure between South East Asia and the Middle East. VSNL has 5 per cent stake in Intelsat, the global satellite in which many countries have an equity stake. It has the largest number of Internet subscribers. Besides, it has prime real estate in all cities. All these are assets any private company would love to leverage. So Shourie should talk about these in public than lament that VSNL did not diversify enough to create greater value. Reliance Infocom worth Rs.50,000 crores? The front page of a leading pink paper put out a story saying a multinational telecom giant had agreed to buy 3 per cent stake in Reliance Infocom for about Rs.1,500 crore! This may sound incredible because it is difficult to imagine anyone paying Rs.500 crore for one per cent stake of a company, which is yet to even partly operationalise its ambitious plans. This also means Reliance Infocom’s networth, even before becoming operational, is Rs.50,000 crore! Is this the famed Ambani magic? Strangely, the news item did not give any detail of what the paid up capital of Reliance Infocom might be. But most interestingly, the news item appeared when a top Reliance team was in the United States negotiating a possible equity partnership with Qualcomm, the leading telecom equipment manufacturer in the US. But what takes the cake in the whole episode is the financial paper’s capacity to stretch credulity.