Tuesday, July 9, 2013

The politicization of the rupee’s slide….

The Indian rupee has slid by some 9-10% this calendar year. It breached the 61 level yesterday (against the $), before recovering to some 60 odd today. This slide has set off an extensive, panic-stricken, media reaction; and the concomitant political “outrage”. Unfortunately, and as often happens in our country, very few understand the subject, yet too many comment on it!

Foreign exchange (forex) is a complex subject. It’s certainly beyond the understanding of most people. The rate at which a local currency trades depends on several factors. The absolute rate is never important (a dollar is worth Rs 60 and 100 Japanese Yen …..this does not mean the Yen is a weaker currency than the rupee, though that’s what lay people believe!). The direction of change (appreciating or depreciating) and the extent of change is more important. Many times, a currency is depreciated strategically by the country so as to improve its export competitiveness. In many cases, the most important determinant of the rate, and its movement, is the forex flows in and out of a country…..driven by considerations outside the economic sphere of a country. It does not mean that a country is “sinking” or any such bizarre thing!

Yet, our economically illiterate opposition cannot hold itself back. It just has to show to the world how ignorant it is. Ignorant, but smart. Smart, because it does manage to fool the public with its inflammatory comments. When words such as sinking are used, it creates the impression of a country’s economy being in rapid descent. When jokes are cracked, it belittles the issue, but worse, it dampens the spirit of every citizen. Here are some jokes doing the rounds (they are funny!): 1. $un raha hain tu…. ro raha hun main (the "r" being the rupee symbol)! 2. How smart is your auto spell corrector? I think mine is smarter. I typed RIP and it corrected it to Rupee! Funny, but such jokes cause a lot of damage. Prakash Javdekar of the BJP, who I bet hasn’t a clue of the subject matter said “This is the biggest failure of the economist Prime Minister to manage the economy”. Well, his frustration is understandable – he has to attack the PM and the Congress, and so why not on this subject!

But the forex rate cannot be a commentary on the economy. It represents only a part of the economy. A sliding rupee does indeed put burden on the economy because the cost of imported items increases. This can lead to inflation. It can lead to reversal of the downward movement of interest rates. So yes, it is a problem alright. And it must be contained. No one can complain that the authorities responsible for managing the external economy – the RBI, the Finance Ministry, the Ministry of Commerce, the Planning Commission, the PMO – are doing their bit to pull in the sliding rupee.

The key point that must be repeated however is that a sliding currency does not necessarily indicate a sliding economy. Nor the reverse. Take the Euro. It “rose” from a low of 1.20 to a dollar in July last year to a high of 1.36 in Feb this year and is presently at 1.28, higher than a year back. Yet, the European economy has slid back into a recession. The US economy on the other hand, is actually quite strong. The Japanese Yen is another interesting story. It has fallen from 78 odd to a dollar to 100 odd now. In the meantime, its economy has grown the fastest in recent times, recording a growth of 4.1% in the latest quarter (Jan – March).

In the Indian rupee’s case, there are a number of factors responsible for the fall. Much of the fall has happened since June, primarily because of large FII debt outflows in that month (some $5.5 billion). Then there is the $170 billion odd which is “short term debt” which has to be returned by India in the next 12 months. That is weighing on the forex markets. And then of course, there is India’s well known capital account deficit problem. With oil prices firming up (thanks to US economic recovery), and with gold imports continuing, and with exports remaining sluggish (thanks to a generally poor global economic environment), the CAD is expected to remain under pressure.

All this does not mean that the economy is faring badly. Prakash Javdekar forgot that while the Indian currency has “done the worst in Asia”, its stock markets have “done the best”. Since Jan this year, the Sensex has remained flat, while the Shanghai index has dropped by 12%, the Russian index by 13% and the Brazilian index by 26%. The MSCI emerging index has dropped by 14% (source: yesterday’s Mint). If the economy was so weak as claimed by Javdekar, then why has the stock market not crashed? Surely that’s a better indicator of economic health than the rupee? Surely, foreign companies would not be making open offers to buy off the Indian shareholding?

The Indian economy is on a rebound. 4th quarter FY13 growth was marginally higher than the 3rd quarter number. The expectation is that growth in FY14 will be higher than in FY13, forget whether it is 6.5% or 5.5%. The government’s policy paralysis – induced no doubt by a series of scurrilous CAG reports – has ended. Decision making is taking place at a frenetic pace. The Cabinet Committee on Investments set up after the February budget had already cleared proposals worth more than Rs 74000 crores by March itself (http://tinyurl.com/mo9hjps). The coal ministry recently cleared fuel linkages to power projects worth an investment of more than Rs 50000 crores (http://tinyurl.com/monf54j). The PM is pushing for a more liberal FDI regime in several new sectors, including forever taboo sectors like Defence and Media. Fitch has recently revised its India rating from negative to stable. In summary, though the rupee is sliding, there is no reason for anyone to attack the government.

The real truth is that illiterate, idiotic comments on a subject as complex as forex rates should be avoided by our politicians. The economy is best understood by experts. Media coverage should be limited to the financial dailies and magazines. Sensationalizing the sliding rupee may be politically wise for the BJP, but it only shows its utter irresponsibility.

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