RBI must enter forex market to support rupee, curb inflation: BoA-ML

According to BofA-ML, the Indian rupee will remain volatile till RBI recoups the forex reserves of $65 billion, including the forwards which it had sold since the 2008 global credit crisis

Mumbai: Leading brokerage Bank of America- Merrill Lynch (BofA-ML) has said that the Reserve Bank of India (RBI) needs to intervene in the forex market to recoup the rupee and thus arrest the imported inflation, considered the main reason for spiralling prices, reports PTI.
Stating that lending rate cuts and higher forex reserves hold keys to the market and growth recovery, a BoA-ML India report, authored by its chief economist Indranil Sen Gupta, said: "The rupee will remain volatile till RBI recoups the forex reserves of $65 billion, including the forwards which it had sold since the 2008 global credit crisis following the fall of Lehman Brothers."
"We do not expect the forex market to get bullish on the rupee until the RBI has recouped forex reserves. After all, the country's import cover has halved to just about seven months -- the least since 1996....
"The RBI will need to buy $90 billion if it is to replenish the import cover to even nine months. Just as importantly, the forex market will also fear that the rupee may see disproportionate losses in case the dollar shoots up," Sengupta said.
The report also said that to stabilise the rupee "the best solution surely will be for RBI to accumulate forex and buy the rupee."
On imported inflation, it said a 10% fall in the rupee translates itself into a 100 bps rise in inflation.
Stating that non-intervention is the reason for the rupee fall, it noted that RBI is not buying forex to comfort the market because it thinks that market may sell the rupee due to a forex shortage which will further fuel inflationary pressures.
The report notes that "in September-November 2011, the steep 13.4% of the rupee depreciation was, after all, aggravated by payment of bunched up dues of about $5 billion to Iran for oil imports. A 10% depreciation of the currency typically translates into 100 bps of inflation." 
The rupee is the second worst performer among the BRICs currencies, after the Brazilian real, losing nearly 19% since September 2011, the report said.
Last Friday, the rupee hit a two-month low of 55.15 to the dollar. The life-time low of the local unit was in mid-June when it had plunged to 57.15 to the greenback. In the year-to 2nd November, the RBI had sold over $21 billion to prop-up the rupee. Between August and December 2011, the rupee had lost 17%.
"The RBI should then achieve its twin objectives of stabilising the forex market and reducing 'imported' inflation pressures. The forex market could easily make 5-10% and its gains would be relatively better protected if RBI is in a stronger position to protect the rupee from contagion," the report said.
The report said "not only has RBI not been able to buy forex, but it has also actually had to sell $14 billion forwards.
"Barring occasional bouts of optimism, most of which have ended in grief, the forex market has sold the rupee for the large part since end-2011. If this continues, the local unit would become a story of lower tops and deeper bottoms," it warned.
Stating that higher forex reserves can drive the rupee again in the 1990s fashion it said, "With the import cover down to seven months, last witnessed in 1996, RBI will again have to generate investor confidence by recouping forex reserves." 
In the 1990s, the RBI used to build forex reserves as insurance cover to protect the balance of payments from a 1991-type crisis. The then governor Bimal Jalan and deputy governor YV Reddy used to buy as much forex as possible during capital inflows and sell as little as they could during capital outflows.
They also floated the 5-year Resurgent India Bonds in 1998 after the Asian crisis and India Millennium Deposits in 2001 to raise $5 billion each, after the dotcom bust.
As these measures built up forex reserves, improved investor confidence led to capital inflows and by extension, appreciation. In fact the rising forex reserves drove the rupee during the FY98-2004 period.
Noting that RBI's exchange rate policy shifted gears by the mid-2000s, the report said surplus capital inflows began to push up the rupee. As a result, the RBI had to buy forex during the up-cycle of 2004-07 to stop undue appreciation the report noted.
However, it notes that the situation changed dramatically after the Lehman crisis. Capital outflows began to pull down the rupee. In response, RBI had to sell dollars to prevent a run on the rupee in 2008 and end-2011.
But it also notes that RBI attempts propping up the rupee between the second half of of 2009 and first half of 2011 against imported inflation at the cost of buying forex, pulled down the import cover down to 1990s levels.


How much of Indian Constitution is for “We, the people”?

Power and money are consciously centralised in India, right from the central government to the smallest political party fighting elections. If only our political leadership resolve to follow the Constitution in letter and spirit, everything else will fall in line

“There are some fundamental issues which we are committed to and are non-negotiable—secularism, equality and non-violence. All that has been written in the preamble of the Constitution, that is our basic agenda”—Arvind Kejriwal


In an interview given to a newspaper early last month, India Against Corruption (IAC) activist Arvind Kejriwal mentioned that main drawback in the country’s governance was centralization of power in Delhi. True, this country’s problems, from day one, post-independence, can be sourced to centralization of power and resources. It does not start or end with government or governance.


Power and money are consciously centralised in India, right from the central government to the smallest political party fighting elections. Perhaps Mahatma Gandhi knew this when he pleaded for the dismantling of the Congress, as he was sadly becoming aware that his dream of ‘Gramaswaraj’ was not being shared by majority of the Congressmen. Success of any India-specific solution for improving major human development indicators—literacy, hunger management, healthcare, and housing—will depend on a decentralised approach.


Our Constitution gives enough flexibility in governance and the clarity of guidance for handling almost everything coming under the broad responsibilities of legislature, executive and judiciary is perhaps unique to the Indian Constitution. If only our political leadership in whose hands the responsibility of administering the Constitution and introducing further legislation for ensuring such rule of law without let or hindrance, gave the respect due to the written words of the Constitution, we would not be going through the present phase of quarrels among the rich and the powerful for one-upmanship on who is less corrupt.


Keeping the above thoughts in the backdrop, this article attempts to look at some of the rights, responsibilities and duties of a citizen, based on the text of our Constitution.



Most of us are aware of our rights. Still, it will be interesting to look at them in the context of what the authors of our Constitution had to say about them. The Indian Constitution specifically protects rights—such as right to life, right to education, right to work, right to property and right against exploitation. A perusal of the following Articles of the Constitution will throw more light on the kind of rights protected under the Constitution:


  • Protection of life and personal liberty

Article 21- No person shall be deprived of his life or personal liberty except according to procedure established by law.

  • Right to education

Article 21A- The State shall provide free and compulsory education to all children of the age of six to fourteen years in such manner as the State may, by law, determine.

  • Right against exploitation

Article 23- Prohibition of traffic in human beings and forced labour- (1) Traffic in human beings and beggar and other forms of forced labour are prohibited and any contravention of this provision shall be an offence punishable in accordance with law.

(2) Nothing in this article shall prevent the State from imposing compulsory service for public purposes, and in imposing such services the State shall not make any discrimination on grounds only of religion, race, caste or class or any of them.

  • Right to work, to education and to public assistance in certain cases

Article 41- The State shall, within the limits of its economic capacity and development, make effective provision for securing the right to work, to education and to public assistance in cases of unemployment, old age, sickness and disablement and in other cases of undeserved want.

  • Provision for early childhood care and education to children below the age of six years

Article 45- The State shall endeavour to provide early childhood care and education for all children until they complete the age of six years.

  • Right to property

Article 300A- No person shall be deprived of his property, save by authority of law.



A perusal of these rights enshrined in the Constitution naturally takes us to the inevitable question as to whether these rights are really exercisable by the citizens. Let us skip this question and go to the next question: Who is responsible to ensure that these rights come alive and serve the one billion plus lives in India?


For an answer, we have to go back to the Preamble of the Constitution, which reads:

WE THE PEOPLE OF INDIA, having solemnly resolved to constitute India into a sovereign socialist secular democratic republic and to secure to all its citizens:

JUSTICE, social, economic and political;

LIBERTY of thought, expression, belief, faith and worship;

EQUALITY of status and of opportunity;

And to promote among them all

FRATERNITY assuring the dignity of the individual and the unity and integrity of the nation;



Thus, the Constitution is given to the people of India and it is the solemn responsibility of the Indian people to protect it. Of course, the agent of the people carrying out this task is the government. This has been made abundantly clear in the Constitution through a bunch of directive principles of state policy forming part of the Constitution and explicitly stated to be not enforceable by any court, but with a clear direction to government to apply them in making laws.


Directive principles of state policy

Several areas of social justice such as gender equality, right to an adequate means of livelihood, distributive justice, healthcare, avoidance of child labour, protection for vulnerable sections of society against exploitation and abandonment, equal justice, free legal aid for the needy, organization of village panchayats, right to work, right to education, public assistance in cases of unemployment, old age, sickness and disablement, just and humane conditions of work and maternity relief, living wage and decent standard of life for workers, promotion of cottage industries, workers’ participation in management, uniform civil code for the citizens, provision for childhood care and education to children below six years, support to scheduled castes and scheduled tribes and weaker sections of society, raising the level of nutrition and the standard of living of the people, improvement in public health, modernizing agriculture and animal husbandry, protecting environment, protection for monuments and places and objects of national importance, separation of judiciary and executive and promotion of international peace and security are all covered under directive principles of state policy. (Articles-39 to 51)


Thus, by implication, the state is made responsible for ensuring enforcement of citizen’s rights.



By an amendment of the Constitution in 1976, the following fundamental duties of the citizens were incorporated in the Constitution.

It shall be the duty of every citizen of India—

  1. to abide by the Constitution and respect its ideals and institutions, the National Flag and the National Anthem;
  2. to cherish and follow the noble ideals which inspired our national struggle for freedom;
  3. to uphold and protect the sovereignty, unity and integrity of India;
  4. to defend the country and render national service when called upon to do so;
  5. to promote harmony and the spirit of common brotherhood amongst all the people of India transcending religious, linguistic and regional or sectional diversities; to renounce practices derogatory to the dignity of women;
  6. to value and preserve the rich heritage of our composite culture;
  7. to protect and improve the natural environment including forests, lakes, rivers and wildlife and to have compassion for living creatures;
  8. to develop the scientific temper, humanism and the spirit of inquiry and reform;
  9. to safeguard public property and abjure violence;
  10. to strive towards excellence in all spheres of individual and collective activity so that the nation constantly rises to higher levels of endeavour and achievement;
  11. who is a parent or guardian to provide opportunities for education to his child or, as the case may be, ward between the age of six and fourteen years(Article-51A).


If the less than 10% of Indians who are fortunate to reach levels in life from where they can make a difference in the lives of the remaining 1.1 billion people who are less fortunate, resolve to follow the Constitution in letter and spirit, everything else will fall in line.


(MG Warrier is a freelancer based in Mumbai.)



Shivam Mishra

4 years ago

Is people of India following our constitution or not replay me!!!!

MK Gupta

5 years ago

In the absence of rule of law in India, Constitution remains a document for academic studies only as the man on the street is ignored for all practical purposes by all "classes" of the ruling elite.



In Reply to MK Gupta 5 years ago

Together, we can create awareness. Fighting for improving literacy could be the first step.Within India, geographical areas which have higher literacy rates are 'more equal'. We look at issues only from our 'constituency'

nagesh kini

5 years ago

Thank God - We have a robust Supreme Court and a vigilant CAG.
When they act, they are accused of "over-reaching"!
They have been complemented by the RTI.If and when the CVC,CIC and CBI are made constitutional authorities most of the malaise of centralization can be mitigated.
Will this ever happen?



In Reply to nagesh kini 5 years ago


Those who do not wish to count nor be held accountable, call the CAG's estimation of loss to the national exchequer a myth.

Despite the looting of the land and whatever lies above and beneath, really only God alone may know how we keep going from one scam to another without becoming an insolvent republic??

If you think about it, Yeh desh bhagwan bharosehi chal raha hai.

Actually, we cannot Thank God enough.


In Reply to nagesh kini 5 years ago

In recent years statutory bodies,courts and bureaucracy have been struggling to uphold rule of law and to protect the country's people and resources from the greedy and the power-hungry. If "WE THE PEOPLE" do not wake up and act, in the coming days the plundering will be much faster. Without public support, courts and statutory bodies also will get stifled.

GMR Energy seeks rescheduling of Rs2,600 crore loan

The Rs3,250-crore, 768-mw coal-fired GMR Rajamundry power project has a loan of Rs2,600 crore taken from 11 banks

Mumbai: Power-to-airports operator GMR Group has approached IDBI Bank, the lead bank to GMR Rajahmundry Energy, to reschedule its Rs2,600-crore loan, reports PTI.
The group has also asked the lenders to allow the company to delay the commissioning of the project to April 2014.
"We have requested the lenders consortium, led by IDBI Bank, to reschedule the loan to the 768-mw gas-fired power plant at Rajamundry in Andhra (GMR Rajahmundry Energy), due to unavoidable circumstances. We are hopeful that it will be done," GMR Energy Chief Financial Officer Bhaskar Rao told PTI.
He said this is not a debt restructuring, but rescheduling of a standard loan.
The highly-indebted GMR Group has debt of Rs35,000 crore or 3.2 times its balance sheet size at the end of the second quarter.
The Rs3,250-crore, 768-mw coal-fired Rajamundry project has a loan component of Rs2,600 crore taken from 11 banks, Rao added.
Despite many attempts, IDBI Bank Executive Director Ravindra Nath, who looks after the GMR account, could not be reached for comments.
Rao said they have asked the lenders to allow the company to delay the commissioning of the project to April 2014 as gas supply issues are yet to be resolved and the civil work not over so far.
GMR Infrastructure, which is the holding company of GMR Energy, is setting up a 768-mw gas-fired power plant in Andhra Pradesh's Rajamundry district, and was scheduled to be commissioned this April. However, the project is running behind the schedule.
It had incurred a cost-overrun of Rs810 crore so far, according to the company.


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