Indian currency is battered day after day.
By Rajiv Theodore
NEW DELHI: The pace at which the Indian rupee is falling against the dollar is scary. The 63 level never seemed as near, but it happened in the last 15 minutes of trade Monday. The 64 level happened in the first 25 minutes of trade Tuesday.
The Indian currency has lost 15 percent this year-to-date, according to data provided by CNBC-TV 18.
It is not that the government is not reacting to arrest the fall, but it seems the situation is becoming a wee bit out of control to check the free fall. Noted industrialist Kiran Mazumdar Shaw tweeted “The Rupee is in a free fall n there seems to be very little we can do about it…”
There were attempts by the central bank, the RBI, which last week announced measures like restricting Indian firms from investing abroad, and of curbing remittances by resident Indians but which only smacked of a capital control regime and further spooked investors.
What is the malaise that is affecting the currency which in turn is profusely bleeding the Indian economy. One of the main reasons could be attributed to the yawning current account deficit (CAD).
The government is struggling to reduce this deficit which currently stands at 4.8 percent of gross domestic product (GDP), while attempts to push through structural reforms by relaxing restrictions on foreign direct investment have also seen little progress. Moreover, the government’s failure to explore new destinations has led to poor growth of exports. In the absence of a single window clearance system and process delays, exports have failed to register good growth. Even traditional export areas have failed to show resilience making Indian produce globally less competitive.
The government has failed to tap major FDI inflow in the country despite significant reforms in the country. On the contrary the country has witnessed a flight of capital by global giants like ArcelorMittal and Posco. Posco pulled out of its Rs. 30,000 crore steel plant project in Karnataka followed by ArcelorMittal that scrapped its USD 12 billion (Rs 50,000 crore) steel plant project which it was planning to set up in Odisha.
Several factors including, huge delays, land acquisition problems, erratic government clearances, lack of promptness have all contributed to the withdrawal of major companies from India. In fact, Indian companies had invested more overseas than foreign Investors in India.
Global investors had pulled out nearly Rs. 18,500 crore (about USD 3 billion) from the Indian capital markets last month and with the rupee fall continuing, it is expected that the investors will continue to be on the run. Such outflows by Foreign Institutional Investors (FIIs), to be precise, have put have put a continuous pressure on the rupee and is not allowing its resurgence.
The rising import bill has also been a major factor that has curtailed the government’s efforts to tackle the fall of rupee as gold contributes to over 10 percent of the total import bill. Gold imports were 141 tons in April and rose to 162 tons in May.
Moreover the economy has been doing bad. In critical sectors like manufacturing, agricultural and mining the performance has been poor, denting investor sentiments. RBI had cut its growth forecast to 5.5 percent for the fiscal year, from 5.7 percent.
Unfazed, the Department of Economic Affairs (DEA) secretary Arvind Mayaram told CNBC-TV18 that the markets were overreacting and that fears of government imposing capital controls were completely unfounded. He further added that fears of current account deficit being difficult to manage are irrational.
Mayaram said all emerging economies are under pressure, with the Indonesian Rupiah, Brazilian Real doing worse that the Indian currency.
The Rupee slide was followed Friday by Brazil’s Real, a currency that, like the rupee, has been hammered by investor doubts. The Indonesian Rupiah hit a 4-year trough on Monday, as the expected withdrawal of US monetary stimulus prompted investors to shun emerging markets burdened by weak external balances, slowing economies and inflation. Some analysts predicted the weakness could ripple out to other Asian markets, with Malaysia’s current account data, due on Wednesday, likely to be closely watched. A cooling in China’s appetite for its commodities exports has resulted in a sharp deterioration in its balance of trade.
Mark Mobius, executive chairman of Templeton Emerging Markets Group is bullish on emerging markets but he is less optimistic on the outlook for India. He said he is concerned about the country’s bureaucracy. “They’re just moving too slowly,” he said, adding the barriers to investment are too high. While he still invests in the country, “it’s not at the top of the list.”
To contact the author, email to editor@americanbazaaronline.com