MUMBAI, Mar 30: It was a year of turmoil in the foreign exchange market, which saw a 10.6 per cent depreciation in the value of the rupee vis-a-vis the dollar to 39.50 on March 30, 1998, from 35.68 on April 1, 1997. The rupee touched a historic low of 40.45 on January 16.However, there is nothing alarming about it if one compares this with the depreciation of other south-east Asian currencies in the period. Leading the pack was the Indonesian rupiah, which depreciated a whopping 75.1 per cent between August 1 and January 30, the South Korean won slid 41.6 per cent, the Thai baht 39.4 per cent, the Malaysian ringgit 6.8 per cent and the Phillipine peso 31.5 per cent. Thanks to the Reserve Bank of India's rupee-support measures, speculators who had virtually taken over the forex market were kept at bay and the rupee regained lost ground.
On January 16, when the rupee touched a historic low. the RBI unleashed a series of tight-money measures, including a hike in banks' cash reserve ratio, bank rate, fixedrepo rate and a cut in the export refinance limit. The fall of the rupee was triggered by RBI deputy governor YV Reddy's statement on August 14 that the rupee was overvalued by 14 per cent. This was followed by another statement by the then prime minister Inder Gujral saying the Reserve Bank and the centre were working on a `rupee band'. The rupee broke all psychological barriers and went on a roller coaster ride.
The Reserve Bank's strategy to stem the fall of rupee through intervention proved to be a costly exercise as the country's foreign exchange reserves went down by $3 billion. Neither intervention not the conventional method of "talking the rupee down" worked. At one point of time, former RBI governor C Rangarajan said 38.50 was the correct level for the rupee and that it reflected the country's economic fundamentals. However, speculators lost no time in breaking the barrier.
Bimal Jalan took a different stand and kept the market guessing about his rupee-support strategy. To start with, hedirected banks to include overnight investments from nostro accounts into the 15 per cent ceiling in investment in the overseas market.Banks were also asked to charge a minimum 20 per cent interest rate on overdue export bills from the date of advance. Besides, the central bank also imposed a 15 per cent interest surcharge on bank credit for imports to force exporters to bring in remittances quicker.The rupee thereafter ruled at around 38.50/60 for a brief while before slipping once again to settle at around 39.50 on March 30.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
