It’s not just war that brought rupee down, it needs better support

The INR accelerated depreciation due to the West Asia conflict calls for a rethink on the way to manage our countries fundamentals. The India currency has depreciated the most largely due to dependency on oil but there are other factors as well that need some correction. While the incumbent government has taken a lot of structural measures and we are in a much better position than the last currency stress/dislocation but more measure needs to be taken to ensure a resilient outcome.

Some short-term measures required

Raise domestic interest rates and/or reduce the forward points premium in markets by receiving in FX markets to make INR investments more attractive. By keeping local rates lower than the FX implied rates, the rate differentials are forcing importers to lead, exporters to lag and allowing corporates to raise funds locally, convert to FX and use FX funds for offshore activity. Once this anomaly is adjusted, the hedging drivers will change and will also bring in both arbitrage and investment in INR gilts by foreigners

Onshore tax regulations need to equalise asset class agnostic. Today, the equity markets see favourable tax treatment vis-a-vis fixed income. This SIP skew in favour of equity markets needs to be corrected to remove imbalances, especially for a larger country with a large population that lacks a social security safety net. A tax equalisation will help reduce the cost of raising debt for Indian government and corporates and will bring some balance in portfolios seeking risk adjusted post tax return. Tax equalisation will remove the positive skew in the Indian equity markets via SIP flows and make market valuations more reasonable and compelling for any foreign investor to invest in India. The thought process will shift from tax adjusted returns to risk adjusted returns.

Additional Longer term policy measures required While a lot of good work is done on make for India and related PLI schemes to make India more relevant in world trade, there is an urgent need to build world class universities in India. In today’s time most of the top quartile students want to study overseas. So basically, we export top quartile talent overseas and they effectively contribute to growth in other economies. Consider both the qualitative and quantitative gains by building world class universities onshore. Save forex tuition fees, keep brain power in India, foster innovation, save tourism forex spent by visiting parents on overseas locations.

Encourage local tourism, give tourism Infrastructure status as this is one of the highest employment generating industries. This will save forex and bring in international tourism, if we build world class tourism infrastructure. Many countries generate a large part of forex income via tourism. Also, a world class tourism infrastructure will compel the local businesses and again save forex outflow. Lastly, our existence is a function of energy elements, and we need to correct the INR symbol. It has two cuts from top limiting flow of energy upwards. There are less than five currency symbols that have managed to create energy limiting flows. Most have vertical line/s which enhance energy flow or have a line in the centre or lower e.g. Yen. Kazakhstan and Cuban peso have the line on top and see the results. I feel there is a need to correct this de-energising symbol of INR. The spiritual capital of the world needs to re-look at this more carefully. The author is the managing director & treasurer, global financial markets (India), DBS Bank India. Views are personal.