Inside Information behind the collapse of rupee (Sunday Guardian)
MADHAV NALAPAT New Delhi | 24th Aug 2013
A boy sells prayer beads outside a currency exchange shop in New Delhi on Wednesday. REUTERS
dvance knowledge of the steps that the government and the Reserve Bank of India took on the economy, is behind the "speculative collapse" of the Indian rupee, say key officials monitoring backroom activity. This knowledge, they say, has been gained through intermediaries privy to policy. They claim that even a cursory check of the phone records of six currency speculators in Dubai, Mumbai and Singapore busily "short selling" the rupee (i.e., betting on its further fall) and persons in Delhi and other metros known to be close to key policymakers would prove such a claim.
These officials revealed the existence of a network of speculators and financial middlemen who liaised with friends and relatives of top policymakers and on occasion even with the policymakers themselves. "Such contact gave them privileged information that enabled them to make huge and easy profits on the rupee", a source revealed, adding that "key policymakers leaked like a pipe riddled by bullets and observed the oath of secrecy only when they are asleep". They blamed two ruling politicians handling key portfolios as well as others in two ministries and the RBI for the leaks, claiming that one of the politicians "does not know what he is saying or to whom after 9 p.m."
According to the research done by an analyst and his associates of sensitive data, "The run on the rupee began four months ago after market players got private assurances that neither the Finance Ministry nor the RBI would react vigorously to a steep fall in the value of the rupee." Since then, the officer alleged, "These speculators have been in daily contact not only with intermediaries but often with policymakers themselves to get inside information on measures to be followed." But officials of the Finance Ministry, RBI and the Commerce Ministry are clear that this charge is false, and that "no senior official would ever leak sensitive information except to an authorised source".
Another claimed that the fall in the value of the rupee was caused by "market perceptions based on intelligent guesses", and pointed out that "the RBI Governor did not hide the fact that he was reluctant to intervene", when the current catastrophic fall continued. This "emboldened and accelerated the speculation".
However, other officers claimed that the collapse of the rupee was an "inside job" because those betting against the rupee "knew in advance what steps were being taken to protect our currency" and could therefore gauge their (lack of) effectiveness. They pointed out that "big money is being made by the guilty currency traders when the rupee falls". An analyst said that evidence indicates that the insider-speculator nexus is "aiming at Rs 78 to the dollar by 15 October whereas sensible action can reverse the slide". He said that speculators are confident the steps taken till then would be merely cosmetic. Should the reverse occur before mid-October, and the Finance Ministry and the RBI react in a less toothless way, those betting on the fall of the rupee would lose even as 1.26 billion citizens gain. A businessman warned that "even at Rs 60 to the US dollar, several big companies would effectively go bankrupt" and said that he was "surprised" at the "routine textbook responses" to the rupee's collapse.
An officer said that "speculation in agricultural commodities has reached feverish levels during the past two years" and that "such unprincipled activity is responsible for much of the rise in food prices". Because of the free rein given to speculators, he claimed that "today farmers witness wild swings in price while consumers usually suffer huge increases in price". His colleague pointed to the spate of reports about a commodity exchange based in Mumbai and claimed that "regulators knew all along what the factual situation in the exchange was" but took no action because "a top politician is the godfather of the promoter of the exchange". He refused to name the politician except to say that "the links of the promoter of the (commodity) exchange with him are known to government".
Those monitoring speculative activity say that there is "zero interest within the Manmohan Singh government at exposing the nexus between speculators and those well-connected middlemen privy to inside information" about policy or the lack of it. "Those at the top see no harm in they and their kin hobnobbing with those working in speculative funds and international finance companies that have several times been indicted in locations less tolerant of inside information fraud", a senior analyst warned. They also warned that "there is close contact between individuals in the financial community linked to those active in financial speculation in Dubai, Mumbai and Singapore and top Central bankers" and that phone and visit records would bear this out.
These officials were unhappy that the highest levels of the national security establishment were still "sleeping at the gate" where financial fraud caused by insider trading in commodities and the rupee was concerned.
However, another officer pointed out that "bragging about being privy to inside information is a common trait" in India and that therefore "there may not have been any criminal intent in the meetings that have taken place" between some of those orchestrating the short-selling of the rupee (i.e. wagering that the rupee will fall further) and close friends and relatives of key policymakers "in the RBI, the Ministry of Finance, the Ministry of Commerce and the Planning Commission". However, that this "lack of secrecy has cost the rupee as well as commodity prices dear".