44 I BUSINESS TODAY I August 25 I 2019inflation and deprecation of currency – but
the transaction will be in rupees and so there
will be no currency risk. “Foreign funds are
an option when the economy is growing at
a healthy rate and investors are more than
keen to pump in money. I doubt this is the
scenario right now,” says Ahluwalia. At pres-
ent, foreign ownership of government se-
curities is around 4.5 per cent, whereas the
limit is 6 per cent.
Ila Patnaik, former principal economic
advisor to government, says if foreign capital
flows are liberalised for rupee debt, increas-
ing or lowering the policy rate will have a
bigger impact on the exchange rate. “It is all
about weighing the pros and cons and deter-
mining the lesser evil,” an RBI board mem-
ber says on condition of anonymity.
The other options to increase liquidity
are domestic but involve policy challenges.
One is tapping into the RBI surplus. The is-
sue of how much RBI surplus can the gov-
ernment take is being looked at by former
RBI Governor Bimal Jalan, who is expected
to table the report before the next RBI board
meeting. Incidentally, it was Garg who had
opined that the buffer of 28 per cent gross
assets maintained by the RBI was way
higher than the global norm of around 14
per cent. Till the end of June 2018, the RBI
had reserves of `2.3 lakh crore along with
unrealised (or valuation) gain – described as
currency and gold revaluation account – of
around `5.3 lakh crore. The SJM says the
sovereign owns the RBI reserves and they
must be transferred to the exchequer.
Reports suggest the committee is set to
recommend the transfer of reserves but is
still discussing if the transfer should happen
in one go or in tranches. “The government
can use this money to capitalise banks and
improve liquidity,” says Mahajan.
The third option before the government
is to not adopt the BASEL-III norms for
banks and instead lower the CAR. At pres-
ent, the banks are required to keep 9-12 per
cent of capital to risk weighted assets. The
global standard is 6-8 per cent. But lowering
the CAR will not be easy as India has already
committed to the stricter BASEL-III norms.
“When the US and western countries them-
selves are not binding themselves to these
adamant norms, why should India do so?”
says Charan Singh, Chairman of Punjab and
Sind Bank. “If Indian capital can resolve In-
dia’s solutions, why not?”@anileshmahajanHOW WE
SURVIVED PAST
FINANCIAL
CRISES
1991
Balance of
payments crisis:
Opted for mortgage
of sovereign gold1998
Sanctions after
nuclear tests: Quasi
sovereign State Bank
of India issued dollar
bonds2008
Recession:
Expanded the capital
outlay with domestic
banks financing
most of the deficit
2013Taper Tantrum:
Attracted dollar
deposits of NRIs
by offering higher
returnsNATIONS THAT GOT
INTO TROUBLE DUE TO
FOREIGN BORROWINGS
Most of these countries, just like India, have
a twin deficit problem. Demand for more
dollars to service debt led to printing of more
local currency and snowballed into currency
depreciation and high inflation rates.
AND THOSE THAT DO
THIS SUCCESSFULLY
Nations whose currency
is convertible and have
stable twin deficits – fiscal
and current account —
have used this strategy
successfullyAustralia
126New Zealand
100UK
313France
213Canada
115
USA
113External debt to
GDP ratio (%)External debt to
GDP ratio (%)Mexico
36.5Brazil
29.9
Argentina
51.9Venezuela
23Pakistan
36Turkey
53.8
Indonesia
36.2