The Downturn Of The Indian Rupee

8 years, 4 months ago - September 10, 2013
The Indian Prime Minister Manmohan Singh tried to reassure the Lok Sabha on the state of Indian economy on Friday, 30 August 2013 underlining the concern of his government and his reassurance of a quick recovery in the next six months.

“The movement of the exchange rate of the Indian Rupee recently has been a matter of concern. The Rupee has depreciated sharply against the dollar since the last week of May. 

There are concerns, and justifiably so, of the impact this would have on our economy.  What triggered the sharp and sudden depreciation was the markets’ reaction to certain unexpected external developments. On May 22, 2013, the US Federal Reserve Bank indicated that it would soon ‘taper’ its quantitative easing as the US economy was recovering. This led to a reversal of capital flows to emerging economies which are now sharply pulling down not just the Rupee, but also the Brazilian Real, the Turkish Lira, the Indonesian Rupiah, the South African Rand and many other currencies.’ Wars and cries of war are also creating financial and monetary imbalances in the world economy, says the Indian Prime Minister.  ‘While global factors such as tensions over Syria and the prospect of U.S.

Federal Reserve tapering its policy of quantitative easing have caused general weaknesses in emerging market currencies, the rupee has been especially hit because of our large current account deficit and some other domestic factors. We intend to act to reduce the current account deficit and bring about an improvement in the functioning of our economy.’

No Capital Control
“The RBI and Government have taken a number of steps to stabilise the rupee. Some measures have given rise to doubts in some quarters that capital controls are on the horizon. I would like to assure the House and the world at large, that the Government is not contemplating any such measures. 

The last two decades have seen India grow as an open economy and we have benefited from it. There is no question of reversing these policies just because of some turbulence in capital and currency markets. The sudden decline in the exchange rate is certainly a shock, but we will address this through other measures, not through capital controls or by reversing the process of reforms. The Finance Minister has clarified this matter at length, and I take this opportunity to reaffirm our position. Ultimately, the value of the rupee is determined by the fundamentals of our economy. While we have taken a number of actions to strengthen those fundamentals, we intend to do more.”

Banking Sector
Many foreign analysts worry about banking problems that may arise in the wake of the currency crisis. The Indian banking sector has seen some rise in bad loans. The question that needs to be asked is whether there is a liquidity problem or a solvency problem for the borrowers. There is a liquidity problem. 

Many of the projects are not unviable but only delayed, in contrast to the overbuilding that has characterised the banking sector problems in many other countries. As these projects come on stream, they will generate revenue and repay loans. Indian banks are fortunately well capitalised much above the Basel norms and they have the capacity to provide for any non-performing assets until those assets are turned around. 

Political consensus
Manhoman Singh appealed to members of the Lok Sabha this week for cooperation in order to help the country come out of the crisis successfully: ‘It is here that I urge Honourable Members across the political spectrum to reflect on the need of the hour. Many laws that are necessary are held up for lack of political consensus. Reforms such as the Goods and Services Tax, which everyone agrees is essential to restore growth and boost revenues, require States to come to an agreement. We need to forge consensus on such vital issues. I urge political parties to work towards this end and to join in the government’s efforts to put the economy back on the path of stable, sustainable growth.  

There may be short term shocks to our economy and we need to face them. That is the reality of operating in a globalised economy, whose benefits we have reaped over the last 15 to 20 years. We will need to ensure that the fundamentals of the economy remain strong so that India continues to grow at a healthy rate for many years to come. That we will ensure. We are no doubt faced with important challenges, but we have the capacity to address them. It is at times like these that the nation shows what it is truly capable of.”

Impact on Mauritius
The director of the Mauritius Chamber of Commerce and Industry, Rajoo Jaddoo told News on Sunday that the Indian rupee crisis ‘will not affect the fundamentals as trade and commercial payments with India are mostly done in dollars.’ Gobindram Tulsidas, one of the biggest importers of textile products from India shares the same views: ‘ It does not affect at all trade in textile goods from India as we pay in dollars.’ The Government of India makes it a rule that export of textile goods are exclusively in foreign currency.’

The other items imported in large quantities from India are rice, foodstuffs and fuel. The director of Indian Oil, Ranjan Kumar Mohapatra, told this paper that ‘ materially it will make no difference in price of imported oil from Bangalore as payment is made in dollars and according to global pricing.’

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