The countries most applauded by foreign institutional investors - Malaysia, Thailand, Indonesia, South Korea and Philippines - termed as Asian tigers, progressive and forward looking nations, open economies and preferred spots as destination suddenly faced unprecedented upheavals in July/September 1997. The very same people (IMF included) which were upbeat about these economies till the middle of June 1997 and gave public testimonials are suddenly describing these countries as reckless spenders and irresponsible finance managers.The rescue packages have totalled a mammoth $ 17.2 billion for Thailand, $ 23 billion of Indonesia and $ 17 billion for South Korea. These unprecedented sums, backed by the prestige of the IMF, have failed to stop these currencies from sliding further. Even after the announcement of the rescue packages, the Korean won has crashed from 1,200 to 1,700 per dollar, the Indonesian rupiah from 3,200 to 4,200 per dollar and the Thai baht from 37 to 42 per dollar. That constitutes a vote of no confidence not simply in the countries concerned but in the IMF too.There is an Indian saying that those individuals, families and societies which live beyond their means invariably head for financial crisis sooner or later. The recent events have shown that this is true for nations and regions as well.Non-convertibility of the rupee on capital amount was shielding rupee in the last five months but events in South Korea and Japan are impacting currency market. The rupee has depreciated approximately 11 per cent since last August.The rupee and stock market are reacting to the political situation apart from `contagion effect' which is engulfing markets. Even though rupee is not fully convertible on capital account, is still being attacked by speculators. Just before laying down his office on November 22, 1997 Dr Rangarajan had said that the rupee was fairly valued around Rs. 37.50 to a dollar.In less than a fortnight the RBI has to launch a frontal attack on speculation and CRR cut has been deferred. It is widely reported that banks and corporates have been speculating in the form of cancelling and rebooking forward contracts. Thus, some of the commercial banks have been working at cross proposes via-a-vis the RBI was trying to stabilise rupee-dollar rate between Rs. 37.0 to Rs. 38. Cancellation of forward contracts have been banned by the central bank now.In spite of this, the currency market has become very volatile. Other steps such as raising short-term interest rates has been taken to prevent further sliding of rupee against the US dollar. This has led to hardening of interest rates in short term, particularly overnight inter bank call rates have suddenly shot up abnormally.Looking back, India and China are being seen as wise countries, which did not succumb to the pressure or temptations to open their economies beyond their absorbing capacities. Nor did they agree to make their currencies convertible on capital account or introduce derivatives trading in financial sector.If derivative products are introduced at this point of time when the country's macroeconomy is ill prepared to digest them, the speculators would have a field day. Turmoils in currency markets then would have direct impact on the stock market and that would have a ripple effect on real economy i.e growth, inflation, investment and above all well being of economy of common man. Between the demand of FIIs and interest of the nation, the latter is more important.
