How Low Can The Rupee Go ? What Can The Govt. Do ?

[George_Brahmi_III]

[b][size=1][size="4"]What has triggered the currency’s collapse?[/size][/size][/b]

[size=1][size="4"]Investors, foreign and domestic, have been grumbling about the state of the Indian economy for more than a year. Growth has halved in the past three years to an annual rate of 4.8 per cent in the January to March quarter, and the current account deficit reached 4.8 per cent of gross domestic product in the year to March. But the sense of crisis has become acute over the past week. Ironically, the rupee’s fall was accelerated by a series of clumsy official announcements designed to reduce this deficit and strengthen the rupee, including restrictions on capital transfers abroad by Indian companies and individuals. Such measures from the Reserve Bank of India and the finance ministry were interpreted in the markets as a sign of desperation on the part of the Indian authorities.[/size][/size]

[b][size=1][size="4"]How low can the rupee go?[/size][/size][/b]

[size=1][size="4"]Sober economists are less surprised about the currency’s decline than nationalistic Indian politicians. After all, the economists argue, annual inflation at close to 10 per cent (which erodes the purchasing power of the rupee) suggests that the rupee should be declining steadily against those from countries with lower inflation, such as the US. Taking such inflation differentials into account, the rupee could be expected to trade at about Rs65 to the dollar. The counter-argument from the RBI is that increased Indian productivity should compensate for some of that inflation-linked decline, leaving the rupee at about Rs57. In any case, Indian officials say, the decline of more than 12 per cent in two months is so steep that it is destabilising the economy.[/size][/size]

[b][size=1][size="4"]What will the impact be of a sharply weaker currency?[/size][/size][/b]

[size=1][size="4"]The main risk is a catastrophic loss of confidence in India, leading to a vicious spiral in which the fall of the rupee prompts the hurried sale of Indian assets, leading in turn to further falls of the rupee. Companies with short-term foreign currency borrowings will also suffer unless they have hedged their exposure or have foreign income, because their debt-servicing costs rise sharply in rupee terms. On the positive side, a lower rupee should reduce imports by raising their cost in rupees and promote exports. July’s trade figures suggest this is already happening, and is already helping to cut the trade and current account deficits.[/size][/size]

[b][size=1][size="4"]What can India do to restore calm?[/size][/size][/b]

[size=1][size="4"]Policy makers say they are aware that the various piecemeal measures announced so far may have backfired. They plan to focus now on medium-term plans to cut the current account deficit, for example by restarting idle coal and iron ore mines and curbing expensive oil imports. Palaniappan Chidambaram, finance minister, says he will cut the current account deficit to 3.7 per cent of GDP in the current fiscal year, which ends next March. Then they talk of the long-term need to promote more foreign direct investment in India, which will bring in much-needed capital as well as boosting economic growth.[/size][/size]

[b][size=1][size="4"]Will those ideas work in practice?[/size][/size][/b]

[size=1][size="4"]They will not be easy to implement. Investors are disenchanted with India, and politics is an obstacle to reform. One of the best ways to cut oil imports, for example, is to reduce energy subsidies, which Mr Chidambaram has started to do anyway. But a further cut in subsidies will allow the opposition parties to paint the Congress-party led coalition government as the “anti-poor” villain ahead of a general election due by May 2014.[/size][/size]

[b][size=1][size="4"]Can Raghuram Rajan work miracles at the helm of the central bank?[/size][/size][/b]

[size=1][size="4"]The incoming governor of the RBI, who takes up his post on September 5, has a formidable reputation as an economist who warned of the financial risks that finally precipitated the global crisis of 2008 and who has championed the cause of economic reform in India. But he has little control over India’s rambunctious politicians, and there is no record of him having raised the dead or turned water into wine.[/size][/size]

[kiladi bullodu]

spam

[George_Brahmi_III]

[quote name='loser' timestamp='1376976434' post='1304137760']
spam
[/quote]

agreed