Rush for tough reforms seen as February foreign reserves slip

• CB on Monday devalued rupee to Rs.230/dollar bringing in more flexibility to exchange rate
• Economists welcome the moves but call for full floating till rupee finds its value and end parallel rates 
• Analysts say onus is now on govt. to deliver on other reforms proposed by CB last week 

The external sector pain continued unabated as foreign exchange reserves slipped, though just under 2.0 percent in February to US$ 2,314 million from US$ 2,361 million as outflows still showed no restraint while the inflows such as remittances dried up due to unrealistic exchange rate which the Central Bank hung on to for months. 

Coming up with back-to-back corrective policy measures since last week, the Central Bank raised interest rates by 100 basis points in a bid to increase the borrowing costs and thereby reduce money in circulation, devalued the rupee by approximately 15 percent to 230 to a dollar promising further flexibility to deal with the developing situation in the global economy should the situation warrants. 

But economists are wary if the measures were sufficient as former Central Banker and popular socio economic commentator, Dr. W.D. Wijewardena weighed in on the matter. 
“At last some wisdom has dawned on CB’s Monetary Board to allow rupee to fall to 230/US$; this should be the beginning and not the end; the appropriate rate would be the one which reduces premium in black market rate to –Rs.2; this quest should continue till that rate is found,” he tweeted. 

This week, he also said the Central Bank should double the rate hike, which they delivered last Friday to beat inflation, to end arbitrage and to offer real returns. 

Weighing in on the same matter, another economic analyst said now that the Central Bank had begun to make overdue reforms, the onus is now on the Finance Minister and the government to make good on the eight-point policy package introduced by the Central Bank last week. 

“If they are bold enough to do that, they can bring some sanity into the markets and restore the lost confidence in the economy in all stakeholders,” he said, adding that debt restructuring must happen simultaneously while working really hard on the inflows that the Central Bank is talking about.