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India unlikely to see currency crisis, feel bankers

The general perception among the local forex dealers in Bombay on the war of words between Malaysian Prime Minister Mahathir Mohamad and international financier George Soros at the International Monetary Fund-World Bank meeting in Hong Kong is that economic fundamentals rather than individuals forced the currency crash in Southeast Asia.

Marketmen acknowledged the fact that the crash was a result of a free convertibility regime and inadequacies in mechanisms to handle the panic selling of local currencies and the subsequent flight of capital which led the currencies to plunge.

Mohamad had reportedly called currency traders "immoral" and stated that he will ban speculative forex trading in his country. The Malaysian prime minister's outbursts against Soros and currency traders follows the ringgitt plunging to a 33-month low against the American greenback. The Malaysian central bank's efforts to avert the crash by means of hiking the interest rates by 50 per cent and pumping an estimated one billion dollars into the local currency market couldn't save the situation.

There is a general agreement that the Southeast Asian experience holds lessons for India. "If India wishes to be fully convertible on the capital account, then we must possess the capacity to cope with the surging inflows. We must realise that the volume of transactions in the international markets is enormous. Banks and finance companies take positions hundred times the base capital," pointed out Gautam Ashra of Kanji Pitamber and Co.

The scope of speculation in India is limited. There is speculation in swaps, which is regulated by the Reserve Bank of India, Ashra added. According to him, the risk management and hedging products and facilities available in the country are not geared towards the convertibility goal.

Derivatives is another instrument to manipulate the market. It is a twin-edged tool utilised by bankers, importers, exporters and others. Right now, what is required is good supervision by the RBI, he says, adding that this is one of the pre-requisites to introducing hedging products.

There is unanimity that speculation adds depth to the market and some amount of it is necessary to make the use of derivatives successful. Some amount of uncertainty should be there, opines a senior forex dealer.

The reasons advanced for the fall in the Southeast currencies are full capital convertibility, high proportion of exports and re-exports to the gross domestic product, and high short-term debt to foreign currency assets ratio.

"Instead of going towards convertibility, the banks and the market in general will demand more controls. The objective of convertibility is to attract foreign investments. Since we are getting inflows consistently, convertibility doesn't become a necessity," Ashra said.

Both inflows and outflows of forex are subject to the approval of the Reserve Bank of India and the finance ministry. Hence, currency movements, and as a result the forex markets, are controlled by the government with the RBI acting as the watchdog, said a forex dealer with Corporation Bank.

The RBI intervenes in the market to check unhealthy speculation and volatility, he added.

Bankers are unanimous that the economic fundamentals of India are strong and balanced to cope with fluctuations and changes arising out of the movement of capital and currency in and out of the country.

As one currency dealers put it, "The sentiments and feelings in India won't let us down. The government is moving at a sensible pace towards convertibility and this won't allow the rupee to plunge on the scale of currencies in Southeast Asia."