Friends, look at below mentioned data released by Reserve Bank of India (RBI) on the week ended on October 3, 2008….
- India’s foreign exchange reserves which include foreign currency assets, and gold, stood at $283.94 billion. (One billion USD = Rs.5000 Crore, at exchange rate of one dollar = Rs.50/-);
- It is down by $25.78 billion from its peak of $ 309.72;
- Foreign funds have sold equity worth of $10.05 billion during the year;
- The net cumulative investments by foreign funds now stand at $56.28 billion;
Whatever amount foreign funds take out from India, is in US dollar. The concerned bank approaches RBI for Dollar with Rupee in hand for exchange. Increasing number of Dollar requirement creates pressure on RBI and Dollar requirement. Due to excessive demand, value of Dollar starts increasing comparing Rupee. RBI repatriates that much amount. That much currency in the form of Rupee goes out of the market circulation. It creates shortage of currency in Indian market which results into increase in call money rate subsequently to credit crises. Indian banks start squeezing various credit accounts and take measures to attract currency viz., interest rate increase on fixed deposits, certain percent restrictions on fund based bank facilities etc.
RBI has to pump in more money to come out of currency crises. In previous months RBI had increased cash reserve ratio (CRR) to curb inflation. Increase in CRR force Indian banks to keep certain amount, as per guideline of RBI, as reserve. This measure reduces Indian bank’s liquidity and forces them to lend fewer amounts. While in reverse situation, RBI decreases CRR to increase currency flow. CRR was 9.00 basis points. First, RBI released 0.5 basis points, then released 1.0 basis points. Total reduction of 1.5 basis points in CRR increased currency flow to the tune of Rs.60000 crores. As per above, against balance CRR of 7.5 basis points, RBI has Rs.3,00,000 Crore in their kitty. Apart from this, RBI does have reserve money in statutory liquidity ratio (SLR).
As we all know due to global recession, foreigners are in desperate need of money. They have to take their money out. We can assume that not all investment i.e. $56.28 billion shall go out, it may be to the tune of $30 -35 billion. In just an outflow of $10.05 billion, sensex of share market have come down from 21000 to 10800.
Now start calculating the sensex at an additional outflow of $30 -35 billion.
Now consider currency flow and Indian Banks’ credit situation. As mentioned above, roughly $35 billion (35 X 5000 = Rupees 175000 Crore) may go out of India in Dollar. RBI has sufficient fund in their foreign exchange reserves to repatriate that much amount. But, to fulfill Rupees 175000 Crore in system, RBI has to cut CRR by further 4.5 basis points, which RBI can do as it is at 7.5. Till then there will be drastic credit crises in Indian Banking system.
In short global recession is helping RBI in putting Rupee into system without increasing inflation. Dollar Rupee exchange rate shall be on actual basis. In future there are all chances that Indian economy will boost like anything due to its population and consumption. Other nations will have to look at it as potential market.