Forex reserves and rupee dropping fast

THE emerging economic and financial scenario is giving extremely depressing signals while the weekly report released by the State Bank discloses that the foreign reserves held by it shrank to $9.926 billion and the rupee continues to depreciate against greenback and other major foreign currencies. Total liquid foreign reserves held by the country declined to $12.256 billion till May 3, 2008 as against $12.612 billion a week earlier.

The main reason for drop in reserves and depreciation in rupee is that the rupee is under pressure due to rising demand for dollars by the importers since the past few months. Political unrest, law and order situation and weak economic indicators on the domestic front, while rising international oil prices and slow economic growth in developed countries are the major contributing factors. Currency analysts are of the view that if the current situation prevails longer, the rupee could suffer sharp depreciation versus the dollar in coming months. This is an alarming situation for the economic team of the new Government as it burns midnight oil to meet the growing budgetary gap. The Foreign exchange reserves had never been so low in the past few years and for that credit goes to the previous Government that it not only built up the reserves but the rupee remained stable at around Rs 60 against the dollar. In just five months the rupee came under so much pressure that it changed hands at Rs 68 per dollar on Thursday. This massive decline may eat up 10 per cent of the national output, creating further problems in the GDP growth rates that have already been revised down to 6% after a five-year consecutive growth rate of over 7%. One agrees that the reserves came under pressure due to more than projected trade imbalance, reported flight of the capital and speculative trends on the money market. The State Bank has already directed the exchange companies to keep dollar-rupee differentials between the inter-bank and kerb markets at rational level and focus on bringing in remittances into the country. It is time that the Finance Ministry must get to business, take hard decisions and impose higher duties on luxury items to improve the balance of payment situation as mere borrowing from international financial institutions would not help the country in the face of critical economic scenario.