Economic Highlights
New Delhi, 24 June 2013
Tumbling Rupee
WEAK ECONOMY OR US ANGLE?
By Shivaji Sarkar
With the rupee
almost 60 to a dollar now, can we expect to go back to 2003? Possibly every
Indian would like to? The rupee at that time had started appreciating much to
the chagrin of the IT industry and some exporters. The rupee had touched the
level of Rs 46 to a dollar against Rs 49 in 2002 – a significant rise as
fundamentals of the economy grew stronger and inflation was at record low.
There were more
exports, larger number of jobs, as the National Sample Survey Office (NSSO)
tells us – 60 million (six crore) jobs between 1999-2004. The pace of growth
too was faster. Now it is coming down every day and may touch 4 per cent. Jobs
are hardly being created. Large numbers of Indians are subsisting on Rs 17 a
day – an extremely difficult condition, according to the NSSO.
Is India also
going the Brazilian way – facing a mass upsurge against high inflation, transport
fare, taxes and corruption in organisation of the World Cup? India has the
entire recipe including the inflated expenses on Commonwealth Games.
Falling rupee
imports inflation, makes investment difficult, leads to flight of forex and
capital. It leads to turmoil in the domestic economy. It affects creation of
jobs. Weaker rupee will make capital imports expensive, forcing companies to
delay investments. The only advantage is to the IT industry whose profits in
rupee terms swell as it sells cheap labour to the US and the West.
It
hurts an Indian as rupee hurtles down on June 20 to the level of almost Rs 60 –
an all-time low of Rs 59.99 and closing at Rs 59.57 on Reserve Bank
intervention. The reason is stated to be hefty outflows on
US
Federal Reserve's plan to exit stimulus. Market participants panicked after
US Federal Reserve chief Ben Bernanke said $ 85 billion a month bond buying
programme may be slowed down from this year.
That is the
external factor. It is crucial too. Thailand
newspaper The Nation on June 14 wrote
“America
declares war on world currencies”. It cited the instance of Thai baht, Japanese
yen and Australian dollar were made to fall dangerously – yen from 87 to a
dollar rise to 104 and now rising to 94. “The event in Japan and Thailand show that we do not have
control over our interest rate, foreign exchange or capital market. As a
peripheral country, Thailand’s
financial markets are subject to the policy of the US Fed Reserves, which
stands high at the centre of global finance”.
India remains
oblivious of the threat allowing the rupee to roll on.
Sharp
appreciation of the rupee seems unlikely at the moment, for which the weakening
domestic fundamentals are also to blame. The Government went in for
consumption-oriented fiscal strategies after the Lehman crisis, but no
attention was paid to enhancing the long-term growth of the economy.
The rupee has depreciated considerably against the dollar since early 2008; its
30 per cent fall – 18 per cent in the past over two months - is indeed the
highest by far among any Asian currencies. However, this should not be
surprising, given the period has been associated with high inflation, declining
growth, and a burdensome current account (CAD) in need to hefty financing.
The natural
corollary was a rise in fiscal deficit, a fall in domestic savings and a sharp
rise in imports, including the effect of oil prices. This widened the current
account deficit (CAD) to unmanageable proportions. While CAD was at a more
moderate 1-1.5 per cent of the GDP in the pre-Lehman times, it is now projected
at 6 per cent. Given the global risk averseness, it has become difficult to
finance the deficit through capital flows, estimated around 3.3 per cent of the
GDP.
India's
reliance on global capital flows has increased. The investor sentiment has to
revive if India
has to draw the capital to bridge its CAD gap. The long-term solution to the
rupee vulnerability lies in restoring fiscal discipline, correcting structural
inflation and a durable reduction in CAD.
In the short
run, India
can pray for global oil and coal prices to crumble and risk aversion to fall.
However, Deutsche
Bank (DB) in its latest report said that the Indian currency will recover in
the second half of 2013 supported by the Government of India's divestment
programme as well as monetary easing by the RBI. The DB forsees fall in
inflation, pushing up real interest rates and increasing the attractiveness of
investing in rupee assets. It also sees CAD correcting substantially as the
cost of gold and oil decline.
The DB sees a positive
in weak growth. It would lower import demand and check outflow of dollar.
The problem –
weak growth (may be around 4 per cent) - is to continue as per DB forecast. So
would the rupee really rise?
The falling rupee might continue to keep foreign investors away from Indian
debt market in the near future. Global uncertainties have seen them taking a
breather from buying Indian equities lately and lack of buying from current account deficit and cloudy outlook of reforms have
added to the local currency's woes. Outlook of rupee is expected to remain weak
till structural steps are taken to improve CAD”, says Kuntal Sur, Director,
KPMG.
In May, these investors
sold debt (bonds) of Rs 18,345 crore ($3.19 billion) and the trend is likely to
continue until the rupee shows stability. In June another Rs 2000 crore bonds
were sold. Foreign investors have sold equity of Rs 1,374 crore in June
The redemptions in the
debt segment have the Government worried. Bond experts say the biggest factor
which has driven away foreign investors has been the volatile rupee. The cost
of holding domestic bonds has increased, as foreign investors pay more towards
higher hedging due to the rising foreign exchange risk.
It is no solace to point
out that all regional currencies – Pakistani, Sri
Lanka or Bangladesh
– are having worse fate. They are much smaller economies but somewhere have a
link with the fate of the Indian rupee. They are traditionally valued at a
lower rate.
Other currencies like
Australian dollar, Indonesian rupiah and Thai baht have also fallen against the
dollar, according to US Citibank research group. “The fall of all these and
other Asian currencies will continue as the economic fundamentals of these
economies have turned adverse”.
The Nation of Thailand
writes, “The sudden outflow of capital, which has sent the Thai
stock market tumbling and the baht on a sliding path, shows that the interest
rate has little - or virtually no influence - over capital inflow. When the
financial centre - the US Fed in this case - coughs, all of the world's
financial markets recoil for fear of catching a cold.
“We are in the
middle of the (US)
currency war. But few have a clue as to what actually is happening. By playing
the game of the US Fed, we'll all lose our shirts soon”, The Nation adds. It seems to suggest a course for major economies.
They all need to join hands and turn the tide against the US. Would India take the
lead? Or would it plunge Indian and the global economy into turmoil?
Manmohan Singh
was the architect of India's
economic revival in 1991-92.Twenty years later he should not now be responsible
for its downfall. It is time the Government took bold steps to improve the
economy and save the country against currency war. The first steps have to be
taken by him or the falling rupee may bury the UPA 2. ---INFA
(Copyright, India
News and Feature Alliance)
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