Instead of branding forex operators (which includes banks and hoteliers) as speculators, the authorities should address the burning issue of forex shortages. There is growing evidence to the market that our external deficits are large and rising. The rupee has been weakening despite BoM interventions and an informal measure of exchange control applied by BoM on banks. There is already an offshore rupee market for many months now, which is reflecting an increasingly weakening rupee. The recent strengthening of the rupee against the dollar and even the Euro is seen as temporary. The expectation is that the rupee is bound to weaken further in the near term, both as result of external developments, but also due to monetary and fiscal factors of domestic origin.
Holders of forex are expecting the rupee to depreciate later if not sooner, and are waiting for a better rate to cash in. Euro holders in particular have seen a sharper appreciation vis-à-vis the rupee and hope they can get back an earlier and better rate by holding on. Moreover, the cost of holding on to forex is reduced somewhat by the better interest rates available since central bank have been tightening monetary policy worldwide, compared to only a slight improvement in the rupee interest rate. The holders of forex are behaving rationally. They do not want to surrender their forex receipts, and see the rupee falling immediately after, which appears to them as a loss, which could have been avoided by waiting some more.
The basic issue is that forex earners see the signs of a deterioration in the reserves situation. The lack of availability of forex to importers and other purchasers of forex from banks is becoming more acute. In April this year, the BoM had to intervene massively (usd 240mn) to meet the forex shortage. Since, the BoM has only intervened modestly (USD105 mn from May to August). BoM should intervene more strongly on forex mkts. If it can’t or won’t, then it should abandon the rupee to market forces, instead of applying a tacit measure of exchange control, by a prior vetting of bank forex transactions, which will only keep the rupee artificially up, but only for a while. Holders of forex prefer waiting -it’s a one way bet.
The published bop figures for Q1 and Q2 of this year reveal a current account deficit of Rs37 bn for the first half of 2022, and a reserves deficit of Rs21 bn. BoM kept up the level of reserves in 2021, with external borrowings, both by Govt and the BoM. It is harder for Govt to find new borrowings, although BoM is still borrowing more, with some window dressing as well. The forex market is well aware that things are getting tougher on the reserves front, and that the rupee is bound to suffer.
Instead of blaming the market and just watching out idly, the authorities should take steps to
1. Intervene more actively on the forex market to improve supply.
2. Abandon the artificial and counter productive support of the rupee by exchange control. Instead, allow the rupee reflect the actual excess market demand, while taking measures to address the weakness of the rupee.
3. Curtail the excessive fiscal imbalance, which is reflected in the large external deficit, by a fiscal consolidation programme, as urged by many economists since last year, before the downgrading of Mauritius sovereign rating by Moody’s.
4. Tighten monetary policy more significantly, with higher interest rates and liquidity control, to check demand, control inflation and the current account deficit, and maintain net capital flows.
