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Economy
Why the buck took a bang
The rupee has taken a deep plunge
and the government and RBI are struggling to arrest the fall. There’s
panic in the market and diminished hope for any immediate revival,
putting India’s growth story on a pause.
By Sanjeev Sharma
Sandeep Joshi |
Currency
is the bellwether of an economy.
It demonstrates the intrinsic strength or weakness of the economy as
the case may be at a given point of time. It is also an easier number
to understand as compared to the other economic indicators like GDP
growth, current account deficit (CAD) and FII inflows to gauge the
current conditions of the economy. For this reason, a fall or rise in the Indian rupee captures the public imagination to a much bigger extent and features regularly in public discourse as it is also seen as a measure of national pride. Why is everyone talking about the rupee? The currency is in free fall and is making new lifetime lows every passing day. Having touched the 65 mark against a dollar, the rupee has lost over 16 per cent in the last three months and is the worst performing Asian currency and among the worst performing currencies in the emerging markets after the Brazilian real. When jokes start appearing through SMS or on Facebook walls about the currency, you know that it has become a household and water cooler topic. A joke doing the rounds was that the only time the rupee goes up these days is when you toss it!  While
the rupee had been losing over the last month, it has now plummeted
and in the process triggered what is called in market parlance a
perfect storm, which has whacked the already beleaguered India story.
The spiral that has ensued has seen foreign portfolio investors pull
out $11 billion out of the Indian debt and equity markets. Given India’s
weak fundamentals, its external vulnerability and concerns on balance
of payments have mounted, leading analysts to compare the present
crisis to the 1991 balance of payments crisis. However, the rupee fall
is only a symptom of the larger economic problem in the Indian
economy.
India is not isolated in the currency rout being witnessed in several emerging markets across the world, especially those with high deficit. Indications by the US Federal Reserve to start tapering its fiscal stimulus has led to a reset in financial markets as the abundant liquidity sloshing around in the world, which was heading to emerging markets, will gradually start drying up, likely from September.
The trigger The
rupee weakness is only a symptom of a larger problem. India’s macro
indicators have been weak for a while now with falling growth, anaemic
industrial growth, high consumer inflation, high interest rates, high
twin deficits and lack of investments. However, there were ample flows
into the capital markets from foreign investors as the US Federal
Reserve had undertaken a fiscal stimulus to revive its own economy and
the liquidity generated was finding its way into all emerging markets. That has changed since the third week of May as the US economy started recovering and Federal Reserve indicated plans of tapering or bringing down the fiscal stimulus. Most emerging markets have been in turmoil ever since, but those with higher deficit like India have been hurt more. Money has started flowing out of emerging markets back into the US and the days of easy liquidity are now over. Interest rates have gone up in the US, which makes debt more attractive. In addition, Europe and Japan are also showing signs of recovery and money is moving there. JP
Morgan recently downgraded Indian equities due to balance of payment
strains. “If the rupee continues to slide, India will continue to
underperform. Currencies are driving equity markets. Investors are
asking who will fund the deficit. Markets pricing in tapering since
May is a key catalyst,” it said. According to Bank of America
Merrill Lynch: “Fed tapering fears have brought the deficit to the
fore. It has put a question mark on whether India and other emerging
markets (EM) with large deficit will be able to attract capital flows
to finance the deficit. Rupee has been the second worst performing
currency since May 2013, when the murmurs of Fed- tapering began.
However, India has been hit hard on account of high deficit and lower
import cover.” The measures by the government and RBI to squeeze
liquidity, increase short-term interest rates and some curbs on forex
investments abroad have also unnerved investors. Though both have
denied that these were any kind of capital control measures, it did
lead to further pressure on the rupee because it caused panic in the
market. Low investor confidence, policy uncertainty and the looming general election less than eight months away are adding to the sense of gloom and despondency in the economy. Ficci has said the fall in the rupee essentially underlines weakness in the economic fundamentals. “We
should focus on introducing GST, ensure stuck projects cleared by the
CCI make their way out of the desks of ministries into the real world
of projects and get government expenditure on infrastructure back on
track. Otherwise there is a growing belief that little will be
achieved before the elections — a delay we can ill afford,” Ficci
president Naina Lal Kidwai says.
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rocky
times for the economy
 Turbulence
in the rupee and concerns over a prolonged slowdown are leading to
comparisons being made of the situation today with the 1991 balance of
payments crisis.Foreign brokerage Barclays says the current macro context and consequently the monetary policy challenges are similar to those in financial year 1992. Barclays drew comparisons between the current economic situation and the one during the balance of payments crisis of 1991-92, including a sharp GDP slowdown, strained external account and sticky inflation. Deutsche Bank has said the rupee could touch 70 in a month. While
lowering the GDP target to 5.5 per cent, Crisil said the liquidity
squeeze due to recent steps by the RBI will delay economic recovery
and add to corporate India’s challenges. There are mounting
concerns over the increasing uncertainty due to multiple factors.
Citigroup said in a note: “India is now swamped with uncertainty —
monetary/currency policy, economic/investment revival, earnings, flows
and elections. That is smashing the market currently, but more
fundamentally it pushes out any economic/earnings/valuation-based
revival.” Citigroup has argued that the financial year 2014 will
be a washout and it’s time to think of 2015 and beyond. “This is
the fundamental question — how hard has medium-term growth been hit?
That’s because there is now a corporate confidence/credit crunch,
likelihood of it spilling to the consumer, challenges on
reform/regulatory issues (in spite of government efforts), and tough
markets are making it harder. It’s going to hurt — FY14’s gone,
start thinking about FY15 and beyond.”
what
now
The central bank is trying all the tricks in the book to give the rupee a
leg-up
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The government and RBI have taken several steps to defend the currency, but the consensus is that these have not worked, which has caused more nervousness. Finance Minister P Chidambaram has said there is no cause for panic as the government will curb the CAD at $70 billion and finance it.The government and RBI have curbed gold imports as it is seen to be non-productive. The RBI has introduced liquidity-arresting measures and increase in short-term rates to quell speculation. The Finance Ministry has indicated that more steps could come, including curbing imports of non-essential consumer items, FDI liberalisation, allowing PSUs to raise funds abroad and tapping NRIs for long-term funds. In addition, liberalising long-term external commercial borrowings (ECB) and talking to sovereign wealth funds and pension funds for financing the CAD in a stable way is on the anvil. Increasing coal output, increasing fertiliser production and opening iron ore imports again are some of the measures indicated by the Finance Ministry.
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Who
gains
 Exports:
Anything that is exported gains, be it software, auto
components, garments and pharmaceuticals.
NRIs:
This is a windfall situation as dollars fetch more rupees.  An
Assocham survey says there is a bump up by 30 per cent in NRI
enquiries to buy real estate back home. The survey says a lot of
Punjabis settled in Canada and the UK are expected to invest more in
Chandigarh, Dera Bassi, Mohali and Panchkula. However, in a setback to
NRIs, the government has recently banned duty-free import of
flat-screen television sets as baggage allowance, with a view to
curbing imports.
What
it means to you
 Inflation:
A falling rupee brings with it imported inflation as the
prices of imported items go up. As the rupee weakens, you have to pay
more for every dollar of purchase. With trade becoming integrated
across the globe, imports of all kinds of goods have gone up, which
have now become more expensive. An increase in inflation will further
squeeze household budgets that are already extremely strained given
the high consumer inflation of around 9 per cent, high food and fuel
inflation and slowdown in the economy.
 Petrol
and diesel: Fuel imports are the largest component of the
import bill. Petrol prices have been hiked continuously ever since the
rupee weakness began in the last couple of months. This may continue.
Diesel prices are already going up by 50 paise every month as part of
the government decision. Now, there is a proposal for a one-time
diesel hike of Rs 2 per litre in addition to the monthly hike to
reduce the under-recovery on account of the rupee depreciation. This
will further fuel inflation as diesel is widely used in transportation
and agriculture. Prices of food items like onions and other vegetables
have been touching the sky. Edible oil and pulses, which are imported
in huge quantities, will also hurt the pocket. The price of CNG and
piped gas used has also been going up. LPG pricing may also not be
insulated from these pressures.
 Interest
rates: With the RBI stepping in to restrict liquidity and
raise short-term rates, which is considered a classic central bank
response to fight a currency crisis, interest rates have gone up for
loans and EMIs. Several banks like the HDFC, ICICI and OBC have raised
deposit rates, especially for short-term tenures and lending rates.
 Travel:
Foreign travel has become more expensive. With the rupee
hitting the 100 mark to the pound, UK is becoming an especially
difficult destination.
 Education:
Students studying abroad or planning to do so will have to
shell out more. Higher education will be even more expensive.
Consumer
electronics: Mobile phones, home appliances, consumer
durables, laptops,  etc.
have become more expensive due to imported components. A Samsung
spokesperson said the prices of mobiles and consumer electronics were
hiked by 2-3 per cent last month. On the import of components, she
said the indigenisation level varied by each product category. Samsung
said most of these products were manufactured in India except tablets,
laptops and high-end products like UHD televisions. LG had carried out
a hike in prices for home appliances like refrigerators, washing
machines and microwaves to the tune of 3-5 per cent.  Commodities:
Important commodities for the economy like coal and
fertilisers, imported in huge quantities, will also become dearer in
turn, leading to higher power tariffs and increase in cost of
agricultural production.
 Lifestyle:
Imported chocolates, liquor, fruits, apparel and luxury
brands will also go up. Fast-moving consumer goods (FMCGs) made here
will also go up as ingredients become costlier.
Growth,
income and jobs: Growth will become a casualty.  Several
brokerages have lowered their GDP targets for the year to 5 per cent,
same as last year, which was the lowest in a decade. Incomes are not
going up but expenses are, and not enough job opportunities are being
created as investments are not happening. Corporates are also feeling
the pain of higher cost of overseas borrowings, which will curtail
expansions.
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