What led to the decline in the rupee
lUS Fed plan to taper off quantitative easing
•Tensions in Syria
• India’s large current
Why did CAD
• Huge imports
• Higher import costs on crude and coal
• Weak demand in major export markets
What we need to do to temper CAD
• Reduce appetite
• Cut use of petroleum products
• Increase exports
• Hold it at $70bn
• Medium-term objective: bring it down to 2.5% of GDP (Last year: 4.8%
• Short-term objective:
finance CAD in an
• Maintain macro-economic framework that is friendly to foreign capital inflows
• Rupee depreciation will improve exports. Many sectors are regaining competitiveness
• It will also discourage imports
• Fundamentals of the economy are strong
• Forex reserves stand
at $278 billion
• Capital controls
will not be
• Fiscal deficit to be capped at 4.8% of
GDP this year
• Close watch on
spending, especially subsidies that don’t reach the poor
• First quarter GDP
growth will be flat; but year will close with
• Revival of stalled
projects in second half
• Higher manufacturing growth expected after
liberalisation of FDI norms, resolution of
tax issues and fuel
come into play
• RBI to focus on bringing down inflation
The job ahead
• Govt will focus on
• Consensus on subsidy cuts, insurance &
pension reforms, and
New Delhi, Aug. 30: Prime Minister Manmohan Singh today said the rupee slide was a much needed adjustment that should mend the economy by raising exports and checking imports, daring the naysers who groaned that the rupee’s fall would precipitate an economic crisis similar to 1991 when India had to pledge gold to the IMF to shore up its depleted foreign exchange reserves.
The Prime Minister reiterated that there was no need for capital control to check the outflow of dollars and blasted the rich nations for making policy utterences without any considerations on their impact on emerging and poor countries.
Addressing a joint session of Parliament today, Singh said the fall in the value of the rupee by nearly 20 per cent this year “was a much needed adjustment”.
However, he admitted that the GDP (gross domestic product) growth in the first half would be “relatively flat”. Hours later, the central statistical office said growth in the April-June quarter (first half) was at 4.4 per cent.
“Inflation in India has been much higher than in advanced countries … there has to be a correction in the exchange rate to account for this difference. To some extent, depreciation can be good for the economy as this will help increase our export competitiveness and discourage imports,” the Prime Minister said.
However, the rupee’s value had fallen beyond its real intrinsic worth.
“Foreign exchange markets have a history of overshooting. Unfortunately, this is what is happening in relation to the rupee and other currencies,” he said.
The rupee had touched a low of 68.80 to the dollar on Wednesday. The average value in July was 59.73 while last August, the average value was 55.53.
Exporters said the rupee slide benefitted them for a short period as buyers demanded price cuts after some time.
“It (the fall in the rupee which helps make exports competitive) is a short-term benefit, which gets neutralised in the long term with buyers seeking a discount. However, the benefits could be prolonged if the exporters are able to push volumes by reducing prices,” Rafeeq Ahmed, president of the Federation of Indian Export Organisations, said.
Singh made it clear that he would not introduce any capital controls. “The sudden decline in the exchange rate is a shock but we will address this through other measures and not through capital controls or by reversing reforms.”
Earlier this month, the Reserve Bank of India had tightened rules for overseas investments by companies and individuals in an effort to stem capital outflows and prop up the rupee.
The steps triggered worries that the authorities could impose more restrictions on capital flows, potentially making it difficult for foreign investors to pull out their money.
Singh allayed fears of the adverse impact of bad loans on the banking system. “Our 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.”
The sharp decline in the rupee value over the last three months was partly because of an expected tapering of the US Federal Reserve’s liquidity measures.
Singh said rich countries should pay more attention to the impact of their policy steps on developing countries’ economies.
“In a more equitable world order, it is only appropriate that developed countries while pursuing their fiscal and monetary policies should take into account the repercussions on the economy of emerging countries,” he said.