Foreign Direct Investment is the key.

Scared by the precipitous fall in the value of the rupee when Fed Chairman, Ben Bernanke hinted at tapering the bond buying program in the US the government, along with the RBI, has initiated a number of steps to build up foreign exchange reserves and shore up the rupee. Levels for Foreign Direct Investment have been increased in various sectors. Up to 100% in telecom and single brand retail, 51% in multi brand retail, 49% in insurance and defense. Instead of buying from the market oil companies have been allowed to buy dollars from the RBI, reducing pressure on the rupee. To attract money from overseas Indians the RBI has reduced financing rates of banks. $9.6 billion of NRI deposits have already come in. Hit by the fall in the rupee and high inflation imports have fallen by 18.1% while exports have risen by 11.2%, bringing the trade deficit to just $6.8 billion in August. There are plans to allow rupee trading inside India. At present Foreign Investors are not allowed to hedge their rupee exposure in over-the counter or exchange trading markets in India. They must go through Category 1 banks which is expensive. So a Non-Deliverable Forwards market has developed in other countries over which the RBI has no control. It is hoped that allowing rupee trading inside the country will be controlled, thus preventing wild fluctuations in the value of the rupee, and deepen the credit default swaps market. But will it not make it even more dangerous? It was the collapse of the credit default swaps that led to the sub-prime crisis in the US and what is to prevent foreign investors from playing games both inside and outside the country. The daily foreign exchange market runs at over $4 trillion so the entire foreign exchange reserves of India amount to loose change. Most of these measures are short term to attract hot money and could reverse in an instant. The only real remedy is to increase Foreign Direct Investment. FDI did increase by 6% between January and June to $10.87 billion but this is nothing. Our infrastructure alone needs $1 trillion. Trouble is that our politicians are good at passing laws but self interest prevents implementation. Walmart has already left, along with Posco and Arcelor Mittal, and now the mining giant, BHP Billiton has surrendered 10 oil and gas fields because of failure to get clearance. The money is out there. But can we get it?