(MENAFN- Khaleej Times) Indian policy-makers will have to think out of the box ideas to stabilise rupee, accelerate GDP growth and create more jobs ahead of elections, writes Muzaffar Rizvi
Indian rupee is 'apparently' seen stable at present levels after a steep decline in past two months. The currency shed 10.10 per cent, or 545 paisa, in straight eight weeks and hit life-time low of 60.76 against the greenback last Wednesday. It reflected the trend established in past two years when the currency depreciated 24 per cent and 18 per cent in 2012 and 2011, respectively.
The market players fear downside risk on Indian rupee will accelerate in days to come due to adverse conditions for the South Asian nation currency. Foreign Institutional Investors (FIIs) have withdrawn approximately $5 billion from Indian debt markets alone since May 22, when Fed chairman Ben Bernanke announced his plan to scale back multibillion dollars stimulus package.
It is a general perception that the rupee is unlikely to recover its lost value against the US dollar and it is a hard fact that the currency will remain under pressure in the long term due to nasty current account deficit, sustained foreign funds outflows from Indian debt market, slowdown in gross domestic production (GDP) and industrial output while fiscal deficit, pegged at 4.8 per cent of GDP, is better than market consensus.
The currency got a little support from the central bank, although it received short-term stability amid speculation that the Reserve Bank of India (RBI) may intervene to check the currency slide. With $287.8 billion current foreign exchange reserves, which is sufficient to support around seven months imports, there is little room for the central bank to rescue the currency, although experts do not rule out a limited role in this regard. Economists also see no RBI rate cuts in the short run as rupee weakness prevents the central bank to hold on its aggressive interest rate policy and earnings upgrades.
The currency slide indicates another area of concern, which is worsening Indian external debt that rose 12.9 per cent in financial year 2012-13 to $390 billion on account of a sharp rise in short-term trade credit. According to RBI data, external commercial borrowings and NRIs deposits are on the rise and the country will have to pay back $172 billion short-term debt by March 2014. External commercial borrowings hit highest at 31 per cent of total external debt followed by short-term debt (24.8 per cent) and NRI deposits (18.2 per cent).
If rupee slide continues and US Federal Reserves rolls back its cumulative easy money policy as per announced schedule, it would be a tough task for the government to meet its obligations in the election year. Besides meeting its $172 billion short-term debt repayment obligations - about 60 per cent of foreign exchange reserves, India needs around $90 billion of net capital flows to meet its current account deficit projected at 4.7 per cent of GDP by the Prime Minister's Economic Advisory Council for the coming fiscal year.
Positives for currency
Hopes of US Fed may taper off its $85 billion a month bond-buying programme from later this year and ultimately end at 2014, will ease pressure on Indian currency. In rare possible case to extend Fed policy for a year or more will be a blessing in disguise for the rupee.
On domestic front, some corrective measures are required to restore the confidence of FIIs in order to slowdown the withdrawal of outflows. Bold initiatives to attract foreign funds inflows are need of the hour and it is better if they come sooner than earlier.
It is a good omen that the government is committed to defend the currency as Finance Minister Chidambaram publicly stated that the reforms and rupee defence now his top policy priorities. The central bank should also review its strategy and play its due role in stabilising the currency at present levels.
New taxes on gold imports is a step in right direction and with plunge in gold prices, the government is expected to narrow the trade deficit by $4 billion this fiscal. The government may see a 'sizeable' export growth to United States and its Asian trading partners due to lower rupee value.
The economists fear that the emerging nation may lose its investment-grade rating if corrective measures are not adopted to bring stability in forex and equity markets. The government needs to check exacerbate outflows, control current account and fiscal deficits and accelerate growth. The government economic managers and policy-makers looking to revive an economy that grew at its slowest in a decade in 2012-13 will have to think out of the box ideas to accelerate the growth, create more jobs and tame inflation in order to win the hearts of voters.
The analysts and forex market players are of the view that Indian rupee cannot rally until emerging markets perform better and the country's forex, debt and equity markets stabilise and forex volatility calms down. Depreciation in the currency in past two and half years has been huge and any positive development i-e offshore bond issuance, arresting current account deficit and continuation of Fed's stimulus plan may result in explosive rally that may help the Indian unit to recover some grounds. For the next three months, the currency is likely to trade in 57-63 range against the greenback, however in the long run it would be stable in tight range of 60-62.
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