Monday, July 8, 2013

Why the Indian Rupee isn't appreciating anytime soon


I might not be wrong to say that at no point in time since India attained sovereignty, has the Rupee depreciation seen such a public discourse. Social networks have played a part in this. It also points to a fact that the Indian masses are much more educated and aware of the economic scenario in India and the world over. They are discerning to the issues affecting their lifestyle and savings. India was always known for its scientists and mathematicians, from Aryabhatta to Bose among others. Indian economists were not too revered. It was always about the Keynesians & Hayekians. Things have changed now with Nobel laureate Amartya Sen to the Prophetic Raghuram Rajan and Ex-RBI governor YV Reddy, who got accolades for his iron fist in insulating India from direct damage of the 2008 economic tsunami.

Getting back to the vertical descent of the Indian rupee, it’s slightly difficult to give weightage to the factors for this slide. Global economic scenario and India's economic policies are to be blamed. It was a foregone conclusion that as soon as cheap money through US quantitative easing starts reducing, it will have direct consequences for the emerging markets where majority of this money flowed. The timing though was not factored in. Among the BRIC countries, India is the only country with most diverse democracy. It can be strength and equally a weakness. The economic loosening for the Indian industry expected as early as 2004-5 never occurred. Foreign institutional investors (FIIs) and Foreign Direct Investment  (FDI) in India was ‘despite the policies rather than because of’. The overflowing coffers of cheap money from developed nations had to flow in India. The developed markets were saturated with predictions of a laboured economic recovery. Economists again got it wrong this time with US showing more than just green shoots. Naturally the money was going to flow out at the slightest hint of recovery. This was exacerbated by the India's obsession with gold and the ever-burgeoning import bill for energy- oil & gas.

India has flattered to deceive more often than not on the economic front and this time was no different. With the desired policies not on the anvil, the rupee will continue to fall or abate slightly but appreciation seems a far-off. A year to go for the General Elections 2014, economic policies would be the last thing on the minds of the government. With so many allies to answer to, arriving on a consensus on policies which are harsh in the short-term but good long-term is extremely tough. The focus will be on cobbling their allies to stick together during times when there will be heavy horse-trading. The government and the bureaucracy will go in auto-pilot mode with no major reforms allowed to go through.

Increasing interest rates too cannot be an option because the domestic industry has been calling for reductions from the Reserve Bank of India to facilitate growth. Interventions by the central bank in currency markets will be a temporary balm. It cannot be sustained. Thus they too have been wary of meddling with the markets. Good economic outlook in US/Europe, coupled with lack of reforms and significant energy increases - all these factors are heavily against the rupee strengthening anytime soon. It might recover about a percentage point or two but to levels about a year back seem improbable. 

A clear path might start be visible once the General Elections are over and economics takes precedence over politics. That too would depend on the overall economic strength of the developed markets. Till the time, India has to survive with a weak rupee and hope to live to fight another day.