The current plight of the Indian rupee is “multi-centric in origin” and is just a transient drift as the currency is bound to bounce back in the medium term once the outlook for the global economy improves, according to speakers at a recent seminar.
Dr Bharat Butaney, president of the Indian Business and Professional Council, or IBPC, said the rupee’s fall has global as well as domestic reasons and implications.
Speaking at a panel discussion on the volatility of the rupee, which has nosedived to historic lows over the past weeks, Butaney said India and other emerging markets are unlikely to remain immune to the crisis in the eurozone and the Americas in a context of increased global interdependence.
He said widening trade deficit, large fiscal and current account deficits, increased spending on food and fuel subsidies, weakening economic growth, perceived political resistance to monetary policy change and tax evasions are key factors behind the plunge of the currency. Increasing doubts of foreign investors over the ability of India to tame high food inflation has further aggravated the situation, he added.
Suresh Kumar, chief executive and board member of Emirates Financial Services and Emirates NBD Capital, moderated the panel discussions key-noted by M.K. Lokesh, Ambassador of India to the UAE.
Speakers included Ajai Kumar, chairman and managing director of Corporation Bank, K.V. Rama Moorthy, chief executive of Bank of Baroda’s GCC operations, G. Raj Kumar Nair of Punjab National bank and Debajyoti Ray Chaudhuri of State Bank of India.
IBPC secretary-general Kulwant Singh said the exchange rate of the rupee would be driven strongly by the impact of global events on India’s trade and capital flows. The deprecation of the rupee will not last for a long time and it will have to appreciate eventually, he said. Lokesh said an increasing gap between India’s exports and imports is also putting further pressure on the currency.
“The widening current account deficit, which is the difference between a country’s imports of goods, services and its exports, was making managing the currency a nightmare. The trade deficit, an important component of the current account, was $118 billion during 2010-2011. For the first seven months of the current financial year, the trade deficit is $93 billion. The current account deficit has widened to over three percent of the gross domestic product. Therefore, the immediate simple answer is that the fall is caused by flows driven by supply and demand,” he said.
Ajai Kumar said India has strong growth fundamentals to tide over the present rupee crisis.
Moorthy said the depreciation of rupee is like both sides of a coin. “It has got both advantages and disadvantages. If it is adversely affecting a particular sector, it also favours some other sectors.”
“Companies that export and operate overseas will witness their revenues shoot up and will earn more revenues in terms of rupee. Sectors like IT that are dependent on outsourcing will stand to benefit the most. Imports will become expensive. Trade deficit is likely to go up on account of higher import bill of crude oil. Apart from crude oil import, import bill of gold is also on the rise,” he pointed out.
Moorthy said foreign direct investments and foreign institutional investor inflow have shown a sign of reversal due to a persistent rise in inflation, a widening fiscal deficit and lack of political consensus to go for required economic reforms.
Nair pointed out the difference between the rupee’s current depreciation and its devaluations done earlier. “While devaluation is an intentional decision by the authorities, depreciation is an unintentional behaviour of the market in a floating rate system. Devaluations are resorted when the country is facing forex shortage to meet its imports, with a view of making exports more competitive thereby enabling more inflow of forex,” he said.
The rupee was devalued twice in 1966, when its value was cut from 4.75 per dollar to 7.5 per dollar, a 58 per cent devaluation. It was immediately after the war with Pakistan. Another one was in 1990 to the extent of 19 per cent, when India faced with a current account deficit of $9.44 billion, said Nair.
Chaudhuri said the fall of the Indian rupee is not a reflection of the fundamentals of the Indian economy, which remains strong. “The rupee might remain weak in the short term due to global developments and therefore exporters from India and NRIs should take advantage of this. In the medium term the rupee would strengthen once the outlook for the global economy improves,” he said.
Source:http://www.khaleejtimes.com/DisplayArticle.asp?xfile=data/business/2011/December/business_December536.xml§ion=business&col=
