Rupees run dry

Bhutan : With rupee borrowings to pay for imports from India having reached a staggering INR 10B, and its demand by the Bhutanese economy showing no signs of slowing down, the central bank is doing what it can to address the problem – borrowing more rupees. Central bank officials are negotiating with India’s central bank, the Reserve Bank of India, to borrow from them. The interest rates would be relatively cheaper than the State Bank of India line of credit. According to an official, it is expected to be around 6.2 percent. SBI charges an interest of 10 percent. It is five percent from a credit facility extended by the government of India (GoI), which has a limit of INR 3B. “The initial plan was that RBI will lend in dollars but, due to the rising demand for rupee, we requested them to lend us in rupee, which they’ve agreed to,” the official said.  This will be the third line of credit for Bhutan to borrow rupee. Other option to meet the demand for rupee is to enhance the limit from the SBI line of credit by INR 2 to 3B.  The official from RMA said the limit has already been exhausted at INR 7B. While no more can be borrowed, there is a rising demand for rupee within the economy. Domestic banks have not been able to meet the demand with its reserve exhausted.  RMA will be sending a letter to the State Bank of India today, requesting them to enhance the limit. All the local banks have been requesting the central bank for rupees, which RMA has not been able to provide. The Bhutan National Bank’s chief executive officer, Kipchu Tshering, said their accounts in India have exhausted and reached almost negative now. “We have to send back most of our customers, who come to the bank looking to exchange ngultrums with rupees,” he said. While there is a 400,000 limit an individual on exchanging ngultrum with rupee, there is no restriction on drafts and letters of credit.  The rupee, which the banks get from RMA, is maintained with Indian banks by the local banks.“The situation is getting worse and there seems to be no solution,” he said. The situation is similar with the rest of the banks. T-bank’s balance in their accounts in Indian Axis bank has reached only INR 10M, while Druk PNB’s balance has reached around INR 2 to 3M.  Bank of Bhutan’s chief executive officer, Passang Tshering, said that they were in a slightly better position but, in recent times, it has received complaints of rupee shortages from its customers.  While there has been increasing rupee deficit, the economy’s foreign exchange reserve has been growing. Although figures were not available, central bank officials said, forex reserve (dollar) has been increasing as of now.  In the 2009-10 fiscal year, convertible currency reserves increased to 838M from 759M in the previous fiscal, according to the RMA annual report.  Against the backdrop of rupee crisis and increasing foreign exchange reserve, Bhutanese economists suggests selling dollars in the Indian market for rupee. An economist said since rupee is more important than dollar, given the volume of trade with India, selling USD in the Indian market could address the issue for some time. “Moreover, the dollar has gone up to INR 49 to 50 a dollar, which would mean higher returns,” he said. For example selling USD 200M in the Indian market could fetch Nu 9.8B, which is almost equivalent to the rupee deficit of INR 10B. But then the constitution mandates 12 months of import expenditure from the foreign exchange reserves, and RMA officials said selling dollars in the Indian market would provide only temporary relief.  In most developing economies, the constitution mandates only five to six months of import expenditure from foreign exchange reserves, according to another economists. 

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