Financial Times UK (May 18, 2012)
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http://www.ft.com/cms/s/0/382214d4-a02a-11e1-94ba-00144feabdc0.html#ixzz1vDApl7eQ
As India’s battered currency fell to new lows this week, local
television news talked of “carnage” on Dalal Street, the home of the
Bombay Stock Exchange.
But worried investors had a more pressing concern: just how much lower
might the rupee fall?
More
ON THIS STORY
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After a week of declines the currency dropped again on Thursday,
hitting its lowest ever mark of Rs54.58 against the dollar, beating the
previous low set the day before. This happened in spite of
interventions from the Reserve Bank of India.
India is far from alone in seeing its currency fall as international
investors pull back to safer assets. Other Asian currencies, including
Indonesia’s rupiah, have gone down too, while declines in Brazil’s real
have been greeted with undisguised enthusiasm in the country.
Not so in India, where the rupee’s weakness is seen as a sign of more
profound underlying economic problems.
Such things brings back unpleasant memories too: it was a humiliating
balance of payments crisis that forced the country to open its economy
in 1991.
“The dropping value of the Indian rupee essentially reflects the
economic malaise in India as well as the sense about the economy’s
vulnerability to external shocks,” says Eswar Prasad, senior fellow at
the Brookings Institution and an adviser to India’s finance ministry.
This vulnerability stems in part from the eurozone crisis, but more
specifically from a distinctly Indian combination of slowing growth and
high inflation, alongside growing current account and fiscal deficits
that its government seems impotent to remedy.
“There are some emerging economies, like China, which have a reasonable
amount of policy space . . . but India is severely constrained on both
fiscal and monetary policy, because of circumstance but also because of
poor recent policymaking,” Mr Prasad says.
Some analysts are sanguine about the decline, noting that the
depreciation of the currency – roughly 20 per cent over the past year –
should gradually rebalance the current account, boosting exports in
manufacturing and IT while curbing domestic consumption and cutting
imports.
The RBI also claims to be comfortable with the fall, in spite of its
moves this week.
“We don’t intervene to arrest the rupee’s fall, we intervene only to
arrest the volatility, you must understand the difference,” said
Kamalesh Chakrabarty, deputy governor.
Yet others are more concerned. Neelkanth Mishra, a respected equities
strategist at Credit Suisse in Mumbai, said in a note on Wednesday that
worries had even reached a point where many investors now feared an
outright currency crisis.
The RBI has reserves of about $260bn – enough to cover at least six
months of imports. Analysts suggest that it also has a range of options
to bring in fresh funds if it feels the need – including selling
dollars to oil importers; raising limits on bond purchases by foreign
investors; or even introducing special bonds to attract capital from
Indians abroad.
This provides some comfort, according to Arvind Subramanian, a fellow
at the Peterson Institute for International Economics. “I don’t think
there is going to be a serious collapse of the rupee. The central bank
has enough ammunition to prevent anything major happening,” he says.
Yet if a full-blown balance of payments crisis is not on the cards,
further downward pressure seems likely. India’s import bill is rising,
notably in areas such as oil and energy, where in-elastic demand means
less relief is likely from a currency depreciation.
Exports also fell unexpectedly in March, and are likely to continue to
struggle as India’s dominant European markets slide back into recession.
Meanwhile, badly needed foreign capital is in short supply as
disgruntled investors pull out money because of concerns about mooted
tax changes.
The result, according to Ritika Mukherjee, an economist at Ambit
Capital in Mumbai, is a current account gap projected to hit 4.4 per
cent of gross domestic product this year, and a currency likely to head
as low as Rs58 to the dollar.
Such moves would trouble foreign investors, worried about further
currency hits on their portfolios. But they could have an even more
profound effect on the wider economy.
Before the recent slide, consensus projections suggested the RBI would
bolster growth through further rate cuts this year. But with
depreciation-induced inflation pressures rising, fresh reductions look
less likely.
Ultimately, economists agree that the rupee will remain weak pending
more fundamental reforms to increase investment and attract foreign
capital.
But while India’s weak and drifting government has shown few signs of
such actions, some still find limited room for optimism, even if only
because they sense something approaching a crisis might finally stir
the administration.
“I am actually very glad this is happening,” says Mr Subramanian,
“because unless this government gets a kick in the pants in terms of a
withdrawal of money or a declining exchange rate, there will no spur to
action towards real reforms.”
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