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Tumbling Rupee: WEAK ECONOMY OR US ANGLE?, By Shivaji Sarkar, by Shivaji Sarkar, 24 June, 2013 Print E-mail

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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