Swap Windows: All that the beleaguered economy wanted!

The Indian rupee may have been down by 12 per cent since the beginning of the year, but of late, the Indian currency has fared the best among all the weak currencies (especially from Emerging Markets). Since the day Raghuram Rajan took over as the governor of the Central Bank, the rupee has appreciated by 7 per cent. Not only has the rupee gained the lost value but even sporadic hints from the Fed regarding Quantitative Easing tapering failed to deter it.

This shows the stability in its fundamentals, which seemed long lost before September, when it was encountering a daily fall. In addition, the improved Current Account Deficit (CAD) and trade Deficit numbers have further backed up the currency. With the kind of optimism that international rating agencies are showing for the Indian economy, case of further downgrade for India from their side appears to have shifted to the backburner, at least for a little while.

But what exactly caused this resurgence? Is it all about Rajan and his stabilization measures?

Definitely, the resurrection in rupee and economy should be attributed to the stabilization measures introduced by Rajan, but introduction of ‘swap windows’ stands out as clear frontrunner among all the steps taken by the RBI since September. The RBI recovered $ 34 billion through the concessional sap window offered to banks so that they can bring in foreign currency deposits. Before swap windows were opened to the banks, during the July-September quarter, we were left with just 6.5 months of reserves. Constant pressure from oil firms further stressed the already struggling economy. The daily demand for dollar from the oil companies is around $400 to $ 500 million. The oil firms were continuously eating away the dollar reserves. The swap windows not only increased reserves by $ 18 to $ 19 billion, but also improved the import cover by a month to 7.5 months.

Interestingly, now when the ‘swap windows’ have been done away with by the RBI last week, and oil companies are meeting their dollar demand directly from the forex market, the rupee doesn’t seem to feel any pressure. In fact, it has appreciated by 2.26 per cent during the current month. That’s what raises real hopes in the days to arrive still.

What’s more encouraging is that our CAD has improved drastically. Experts have come up with a target of about 2.5 per cent for FY14 as against 4.8 per cent in the FY13. Weak currency has helped in increasing exports and boost in gold import duty to 10 per cent killed gold imports significantly. Gold has observed 80 per cent fall in its imports in the last quarter. Though, with the introduction of these recent measures, cases of illegal gold trading have increased noticeably.

However, amid all the positives that we see, including strength infused by the opening up of swap windows, some concerns still remain with respect to the currency. Nothing can be said with utmost certainty about what will happen if the bond buying tapering program actually begins in the early months of next year. Also, the kind of outflow (about $ 14 billion) that has been seen in the domestic debt market since May doesn’t provide good signs too. We require at least 10 months of reserves to do away with any kind of dangers in the coming future. The government spending has already reached 85 per cent of the budgeted amount in the early half of the year and the fiscal prudence seems difficult to come by for the UPA in the second half, considering the forthcoming parliamentary elections.

Most importantly, we should not forget that the RBI still has to return back dollars (earned from swaps) to the banks, and therefore, coming days would be interesting to watch out for, in terms of movement of rupee and its upshots on the economy.

The opinions expressed in this article are those of the author and do not necessarily reflect the views of our organisation.