Expert Zone

Straight from the Specialists

Foreign borrowing or foreign investment?

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(The views expressed in this column are the author’s own and do not represent those of Reuters)

The market’s response to the currency measures announced on Monday was a dip in the Sensex. Much was expected after the announcement made over the weekend by the finance minister. What has been actually initiated cannot make much difference either to the rupee or to growth.

The measures permit companies to go in for more external commercial borrowings and FIIs to hold more government securities. C. Rangarajan, chairman of the prime minister’s economic advisory council, expects $15-20 billion additionally to come into the foreign currency kitty.

Our current account has been in deficit for a very long time though it has been less than 3 percent of GDP until last year. But in 2012, the deficit has crossed 4 percent, making dollars scarce and pushing the rupee down. To reverse the trend, more dollars have to come in or the RBI has to draw down reserves. The latter can affect investor confidence and, in extreme cases, spawn a financial crisis. Hence, the search for dollars.

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