Rupee Panic
OK, the plunging rupee is the big economics story of the day, and I’m trying to get up to speed on the issues. My immediate question, however, is why the panic?
Yes, the rupee is down a lot in a short time — along with other emerging market currencies. In fact, its fluctuations are small compared with the obvious comparator, Brazil:
(The BIS numbers only go up through July, and I estimated the last month from the dollar-rupee rate.)
We more or less know the story here. First, advanced countries plunged into a prolonged slump, leading to very low interest rates; capital flooded into emerging markets, causing currency appreciation (or, in the case of China, real appreciation via inflation). Then markets began to realize that they had overshot, and hints of recovery in advanced countries led to a rise in long-term rates, and down we went. (I don’t think QE has much to do with it, although your mileage may vary.)
So the recent decline is sharp. But should India panic?
This would be scary if India was like the Asian crisis countries of 1997-1998 or Argentina in 2001, with large amounts of debt denominated in foreign currency. But unless I’m misreading the data, it isn’t:
Now, the depreciation of the rupee will presumably lead to a spike in inflation — but it should be temporary.
So at first examination this doesn’t look like as big a deal as some headlines are suggesting. What am I missing?
There are several points that are missing
ReplyDelete1. This article does not take into account the structural anomalies that are deeply entrenched in an economy with large unequal distribution of income with highly skewed pattern of consumption and investment.
2.The debt-GDP ratio which was 21.2 percent at the end of March 2013 is composed of short term debt of 59 % which is extremely volatile being subject to sudden reversal.
3.It has highest gross financial requirement for any growing economy and in terms of political scenario the incumbent Government is facing policy paralysis and credibility crisis.
4.It also has to repay close to $172 billion debt by March 2014, and with investment drying up and election projections predicting unstable coalition governments, the situation is bleak.
5.With growth dwindling and the economy shrinking, the interest paid on debt is much higher than the return it is earning and leading to the widening of current account deficit which could turn out to be unsustainable if certain measures are not undertaken.
6.An export sector which is not competitive at all and riddled with subsidies.
Still, it is hoped that with the recent policy reforms and with some activism from the Central Bank the economy will be able to turn around for the better and the progress in US economy, as some data suggests, will be of significant help.