Simple way to help Indian economy in this crisis period ! RBI and the government have painted all of us into a terrified corner as the draconian measures they have been announcing almost daily have failed to halt the continuing traumatic collapse of the rupee. The collateral damage in the bond and equity markets is there for all to see. While there may be a sense of bravado behind these desperate measures – we will hold the CAD to such and such level – it is patently obvious to anyone that the speculators that the regulators have been pursing with such fury are nowhere to be found. Indeed, the entire approach of pursuing speculators is being shown up for what it is – a feeble attempt to transfer the blame for failed policy making over the past several years. Speculators, far from being swashbuckling buccaneers (notwithstanding the stylistic preferences of George Soros or Steve Cohen or Raj Rajaratnam), are actually supremely conservative as becomes people who manage large sums of money – their own or other peoples’. They would never put a penny (or dollar, as the case may be) down unless they were doubly – indeed, multiply – sure that their “bet” had a substantial chance of success. These bets are sometimes insured by insider information, sometimes by simple, solid economic logic, the latter being the case in India today. In fact, the recent actions have doubly confirmed to investors (a more polite word for speculators) that their bets were correct and the rupee can go nowhere but down. Thus, when – and it has to be when, not if – RBI lifts some of its terrifying constraints on the market – the rupee will whoosh lower at a pace that will startle all of us Unless, of course, the government and RBI recognize that there is a way out – the only way out that I can see. Even better, it is remarkably simple, easy to implement and, best of all, will have an immediate impact on the rupee’s debauched weakness. The Finance Minister and the RBI Governor should jointly – and immediately – approach the trustees of Tirupati Trust Foundation. Three of these are State government appointees, and, given the current political dispensation, this is a distinct advantage. They should, of course, offer prayers and an opportunity for the already hugely rich trust to make significant additional amounts of money. While there are no definitive statistics available, I believe the Tirupati Trust Foundation has well over 1,000 tonnes of gold. The number I was actually told was 1,700 tonnes, which is about 5% of all the gold held in India (between 30,000 and 35,000 tonnes). To get really excited, multiply that total amount of gold by $ 48.5 million (the value of a tonne of gold at $ 1,350 an ounce) which comes to between $ 1.5 and 1.7 trillion – that’s right, trillion. These, by the way, are assets – it is money we Indians own. And, given that they are foreign currency assets, it is hard to understand why we have an FX problem. The FM and the Governor should offer the Tirupati trustees annual earnings of, say, 3,000 cr [2% interest on 500 tonnes of gold] PLUS savings of the cost of storage of the gold, which, itself could be a significant amount. And, of course, that the gold would be safe with, say, State Bank of India and that it can be retrieved at one day’s notice. It’s hard to see how any trustee could turn this down. On the market side, SBI could hold part of the gold hoard – even as much as 40% – to support any sudden withdrawal, although the beauty of starting with religious trusts is that they don’t really need to ever withdraw the gold. The balance – 60%, or 300 tonnes – can be sold in the domestic market, with the price risk on the sold gold hedged off-shore (at a cost of around 1% a year). SBI would get about 85,000 cr [300 tonnes at $ 48.5 million a tonne] of rupees at a modest cost of 2 to 3%, which it could deploy in lending or, till demand picks up, in government securities. And, critically, gold import demand would collapse, taking the CAD down with it. The plan should be announced as soon as it is finalized – and I see no reason why that should take more than a few days. RBI and the government should then expand the plan to other religious trusts and, ultimately, to individual gold holders. In parallel, they can unwind some of the egregious constraints they have put on the market. Immediately, upon announcement, the global gold price will fall sharply and the rupee will strengthen to better than 60 to the dollar. Come, let us pray!
Posted on: Fri, 30 Aug 2013 12:43:10 +0000
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