Sep 2 () : Rupee fall is the worry of the nation. Indians are bracing for the rupee to touch 70 for a dollar and a repeat of the 1997 crisis in Asian markets. Economic analysts are divided over the fate of the rupee. Some say it could touch 70 and even beyond it. Others say that it will stabilize at 62.
A few days ago, the Central bankers of many nations that would be affected by US Fed tapering the stimulus package asked it to reconsider it. The US Fed clearly told these bankers to find ways to insulate their currencies and not look towards it for help. Their prime concern is the US dollar.
As soon as the process to cut down the quantitative easing (a term used by US known as economic stimulus) the emerging markets and those with a high current account deficit or with surplus foreign exchange will start feeling the effect of the economic hurricane launched by the US. Many of Indian economists including Finance Minister Chidambaram are in a denial mode about the impending crisis.
To revive the economy, the US Federal Reserve is sending out $85 billion of cash per month (called quantitative easing) into the market at low-interest rates. Investors took this money and put it in emerging markets which gave returns. Indian stocks too received a good slice of this.
Now,with the US economy recovering, the unemployment has come down and Fed plans to slowly reduce this cash bonanza in stages. Emerging markets like India have seen fresh flows stop, existing investment from overseas flow back to the US. It could be an outflow of hundreds of billions.
This start of the storm has weakened the rupee by almost 25% in two months. This will hit India and the entire developing world, with every move to tighten the money flow by the Fed.
In 1997, the developing countries were caught high debt, low foreign reserves and were operating on a semi-fixed exchange value. This time all this has changed and we and others in the neighbourhood moved on to floating rates. This time Asian countries will get battered but not collapse.
Malaysia with a surplus of Forex has lost 10% of their currency to the dollar shows the impact. A falling rupee will take 3% of the purchasing power. The only way out is to pump in money. The government has to fund the subsidies and keep fiscal limit from crossing 4.8% of GDP. The only way is dip into plan investment money.
Optimists say that exports will bring in the money. When you have all those emerging markets with falling currencies taking this route, will US and west buy this much is to be seen. The private sector is fed up of waiting for clearance and they would rather look abroad.
Chidambaram is now on a fast track clearance scheme of mega projects to bring in money. He says our fundamentals of economy will bring dollar back to 58 once the panic over rupee fall is over. Each time he says this, the rupee slips further. With rupee fall, prices go up and this takes away the gains from exports.
Indian companies with debts from abroad will be hit and banks who financed them in turn will have to look for funds to cover these bad loans. Growth is down to 4.4%. Wholesale prices are up. With slowdown the tax estimates will have to be in lower levels than expected.
Chidambaram’s disinvestment of PSU stocks is happening as it is sold at discounted rates. A bumper harvest is expected to bring relief. Rupee seems to have regained after RBI entered the market. For how long? Few measures like importing oil from Iran show only a delayed response.
The Syria issue has sent our fuel bills up. It adds to inflationary pressure. Rating agencies have downgraded us. All we need is a credit downgrade.