Indian prime minister admits ‘concern’ at rupee slide

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India’s prime minister has told parliament that the recent decline in the value of the rupee is “a matter of concern”.

The rupee has dropped more than 20 per cent against the dollar over 2013 so far as investors became concerned by India’s large current account deficit and the Federal Reserve’s tapering plans. Yesterday, the rupee hit a record low of 68.85 against the dollar.

In a statement to the Indian parliament, Manmohan Singh said: “The depreciation in the value of the rupee since end of May is a matter of concern. What triggered the sharp depreciation in rupee was the market’s reaction to unexpected external developments.”

Singh said India needs to reduce its appetite for gold and take steps into increase its exports. He also said efforts will be made to keep the fiscal deficit at 4.8 per cent of GDP and argued that economic growth will soon pick up.

The rupee’s slide has prompted some to question whether India is facing another crisis. The country was hit by a currency crisis in 1991, which was resolved with the help of a bailout from the International Monetary Fund.

Capital Economics Asian economist Daniel Martin points out that India’s large current account deficit is its “most glaring problem”, as it leaves the country reliant on foreign inflows – at the same time investors are retreating from emerging markets.

However, he argues that India looks to be in “reasonable shape” when other metrics are considered. For example, foreign debt levels are low at 16 per cent of GDP, the country has a buffer of larger buffer of foreign exchange reserves to fight off a crisis and it appears to be at less risk of banking sector problems than its peers.

Martin says: “Although India’s immediate economic prospects are dire, we don’t think it is heading toward disaster. To be clear, we are not suggesting that India will get through this episode unscathed. Two thirds of India’s foreign currency debt is held by the corporate sector: a rise in bankruptcies is likely.

“Meanwhile, it looks increasingly likely that policymakers will have to tighten monetary policy to stabilise the rupee and limit the pass-through from currency weakness to inflation. That will sap what little economic vitality India currently has, even if it means it avoids a full-blown economic crisis.”