British High Commission New Delhi
The rupee reaches almost 69 to the dollar. So far the government, middle classes and indebted business are taking most of the pain, with many others largely insulated. In the long term there are benefits to a weaker rupee: India needs to reap them.
Despite strengthening on 29 August, over the last week the rupee has continued to drop in value. 28 August saw its biggest single day fall in twenty years. Renewed turbulence has been ascribed to the controversial Food Security Bill and rising oil prices due to the Syrian crisis. The bumpy ride looks likely to continue.
At the heart of the issue lies investor confidence. Finance Minister Chidambaram spoke again in Parliament, emphasising that the rupee is now undervalued and stressing India’s sound fundamentals. But without a substantial package of market friendly reforms, neither his words nor the interventions of the Reserve Bank of India have been able to win investors back on side.
In time, if depreciation results in higher inflation, the effects will be more widespread. For most of India’s population, the value of the rupee on international markets is a non issue. But there are still some who will be losing sleep:
The government. A strong rupee is seen by many as a symbol of national pride. Its precipitous decline is being portrayed by the media and opposition as a humiliation.
The (upper) middle class. Indians planning to send children to study abroad, holiday overseas or import a flat-screen television have seen those plans become much less affordable. That dampens the ‘feel good’ factor.
The finance ministry: India’s heavy dependence on (now more expensive) imported oil means a swelling current account deficit, which will put further downwards pressure on the currency. The fiscal strain is easier to bear now than it might have been: over the last year the government has taken major steps to limit its fossil fuel subsidy burden. Further fuel price rises may now be on the cards.
The central bank: especially new incumbent Raghuram Rajan, who faces daunting expectations when he takes up post on 5 September. Although India’s reserves are still healthy, the limited effect of intervention so far suggests it would not be wise to deploy them.
Businesses who borrowed overseas (and cut corners on currency risk): accurate figures are difficult to obtain and heavily contested, but it seems clear that some have large foreign currency debt which is ever harder to service. So far, no one has buckled under the strain. But the impact may show in time, with significant rollovers scheduled for March 2014.
Anyone receiving remittances: many millions of ordinary Indians. The contributions of those working in the Gulf, America or Europe have higher purchasing power than ever before. That matters for domestic consumption, which has long been the driver of Indian growth.
Exporters: Indian exports traditionally do not respond swiftly to a depreciating currency, due to high levels of intermediate imports. But this time around the figures are showing an increase. And the government is bringing forward further plans to support exports.
Investors in the Indian economy: If you believe in India’s long term story, and many still do, now could be a good time to buy, in the hope of strong returns in the medium term.
Businesses with revenue in foreign currency: India’s largest firms do not necessarily suffer. Commentators suggest that the top firms, making up almost half the value of SENSEX (equivalent to the FTSE 100), benefit from a weaker rupee. Those competing for contracts overseas, including IT and outsourcing firms, should see a boost to their competitiveness.
This is not 1991, when a balance of payments crisis triggered near meltdown in the Indian economy (and the launch of liberalisation). The clearest pressure point is the current account deficit: hence the government’s efforts to attract investment of all kinds, and boost exports.
In the short term, a weaker rupee is something India can learn to live with. Neither industrial performance nor investor confidence is likely to improve substantially ahead of elections next Spring. But that does not necessarily spell disaster: India has just had a good monsoon, which will cushion the impact and push up overall growth. The Indian economy has proved both resilient and adaptable in the past. There is opportunity for those willing to sit out the ride.
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