India still remains a good growth story
Srujani Panda / 12 Nov 2011
While the rupee has seen a dramatic slide, there seemed to be no clarity on what actually led to the decline. Dharmakirti Joshi, Chief Economist, CRISIL, spoke to our Deputy Editor, Shailendra Lotlikar, on the various factors that have led to the depreciation of the rupee, the impact it would have on the economic prospects of the country and the future of the rupee.
Why, do you think, is the rupee depreciating against the dollar?
I believe that there are two elements to it. One is the vulnerability of the system and the other is the shock. The system was becoming vulnerable to external shocks, because corporates were borrowing more from outside and they were also borrowing short term. If you ask me which is the more dominant factor, I would say that it is the vulnerability of the system. Otherwise, we would not have seen such a sharp depreciation.
Compared to the US or the Euro zone, where worries are mounting by the day, India is still expecting a respectable growth rate of 7-7.5 per cent. Why, then, is the currency depreciating?
What you are seeing right now is an impact of sentiments, and you are witnessing the fear of a dysfunctional financial sector. There is fear in the minds of individuals and corporates that they will not get dollars when they want it going forward, and that liquidity would become an issue. In the long run, my bet would be that the rupee would appreciate, rather than depreciating.
Could the probable double-dip in the US have a crucial impact on the currency going forward?
Yes, because that will have a deep impact psychologically. Actually, we can’t even trust the data that comes in, because the US recession in 2009 was actually much deeper than what it was earlier believed to be. The data was revised downwards significantly. There is a fear psychosis right now, and any bad news triggers these adverse events.
Historically, we have seen the rupee touch levels as high as Rs 52 to a dollar. Do you see that happening once again?
This can happen only if there is a genuine double-dip in the US and it is confirmed. Right now, I think some are anticipating a double-dip and some believe that the US is already in a double-dip. Our parent company, S&P, believes that there is a 40 per cent probability that there will be a double-dip in the US.
Coming to the impact of a depreciating rupee, how do you see this hurting us economically?
We are in a high inflation scenario right now. So, whatever benefit we could have got out of falling commodity prices gets neutralised. Secondly, as you know, we are huge importers on the oil front, and that has fiscal implications, as the government would have to shell out more in terms of subsidies. Third is the impact on those who import raw material and use them, for domestic production and consumption will be hurt more. What happens is that, they cannot pass on the rising cost of imports in the domestic economy because the demand is slowing. So, these are the categories which will get burnt more. However, there are always some winners and some losers. The winners will be the IT/ITES companies, who will temporarily gain out of this. Also, exporters will gain, but not too much.
The RBI has not intervened in this episode at all. In fact, their official line too has been that of non-intervention. Who, in your opinion, is supposed to intervene, if not the RBI?
I think the issue is that, you have reserves that are not very high and the import cover of those reserves has also declined. Now, in these circumstances, if the central bank gives a guarantee that it would defend the rupee at a particular level, they would be hedging for you. The central bank probably wants to send out a message to the market to ‘get used to the ups and downs and also hedge against the volatility – we are not going to guarantee any exchange rates, because volatility is a part of life, and we will intervene only when the slide is too sharp either way’.
Where will the current economic scenario lead us to?
As far as domestic policy is concerned, if the demand keeps slowing down, then the central bank will also rethink its policy. Right now, we are seeing inflation much above their tolerable level, which is true, and that itself can be damaging to the economic prospects of the country. The central bank’s ability to manage inflation is a key to the future growth prospects of the economy. If risks materialise again, it will not be a surprise if inflation touches zero again. There are only two good factors that have played out so far. One is that the monsoons have been good, and second, exports have done really well so far.
So, where do you see the rupee by the end of FY12?
India still remains a good growth story, despite the fact that growth has slowed down below eight per cent. It means that capital can give you higher returns here, so money should come back unless it is impaired by a double-dip in the US. Money coming back means that the rupee should see some strength, and that is why we see it coming back to Rs 46-47 to a dollar.
Why, do you think, is the rupee depreciating against the dollar?
I believe that there are two elements to it. One is the vulnerability of the system and the other is the shock. The system was becoming vulnerable to external shocks, because corporates were borrowing more from outside and they were also borrowing short term. If you ask me which is the more dominant factor, I would say that it is the vulnerability of the system. Otherwise, we would not have seen such a sharp depreciation.
Compared to the US or the Euro zone, where worries are mounting by the day, India is still expecting a respectable growth rate of 7-7.5 per cent. Why, then, is the currency depreciating?
What you are seeing right now is an impact of sentiments, and you are witnessing the fear of a dysfunctional financial sector. There is fear in the minds of individuals and corporates that they will not get dollars when they want it going forward, and that liquidity would become an issue. In the long run, my bet would be that the rupee would appreciate, rather than depreciating.
Could the probable double-dip in the US have a crucial impact on the currency going forward?
Yes, because that will have a deep impact psychologically. Actually, we can’t even trust the data that comes in, because the US recession in 2009 was actually much deeper than what it was earlier believed to be. The data was revised downwards significantly. There is a fear psychosis right now, and any bad news triggers these adverse events.
Historically, we have seen the rupee touch levels as high as Rs 52 to a dollar. Do you see that happening once again?
This can happen only if there is a genuine double-dip in the US and it is confirmed. Right now, I think some are anticipating a double-dip and some believe that the US is already in a double-dip. Our parent company, S&P, believes that there is a 40 per cent probability that there will be a double-dip in the US.
Coming to the impact of a depreciating rupee, how do you see this hurting us economically?
We are in a high inflation scenario right now. So, whatever benefit we could have got out of falling commodity prices gets neutralised. Secondly, as you know, we are huge importers on the oil front, and that has fiscal implications, as the government would have to shell out more in terms of subsidies. Third is the impact on those who import raw material and use them, for domestic production and consumption will be hurt more. What happens is that, they cannot pass on the rising cost of imports in the domestic economy because the demand is slowing. So, these are the categories which will get burnt more. However, there are always some winners and some losers. The winners will be the IT/ITES companies, who will temporarily gain out of this. Also, exporters will gain, but not too much.
The RBI has not intervened in this episode at all. In fact, their official line too has been that of non-intervention. Who, in your opinion, is supposed to intervene, if not the RBI?
I think the issue is that, you have reserves that are not very high and the import cover of those reserves has also declined. Now, in these circumstances, if the central bank gives a guarantee that it would defend the rupee at a particular level, they would be hedging for you. The central bank probably wants to send out a message to the market to ‘get used to the ups and downs and also hedge against the volatility – we are not going to guarantee any exchange rates, because volatility is a part of life, and we will intervene only when the slide is too sharp either way’.
Where will the current economic scenario lead us to?
As far as domestic policy is concerned, if the demand keeps slowing down, then the central bank will also rethink its policy. Right now, we are seeing inflation much above their tolerable level, which is true, and that itself can be damaging to the economic prospects of the country. The central bank’s ability to manage inflation is a key to the future growth prospects of the economy. If risks materialise again, it will not be a surprise if inflation touches zero again. There are only two good factors that have played out so far. One is that the monsoons have been good, and second, exports have done really well so far.
So, where do you see the rupee by the end of FY12?
India still remains a good growth story, despite the fact that growth has slowed down below eight per cent. It means that capital can give you higher returns here, so money should come back unless it is impaired by a double-dip in the US. Money coming back means that the rupee should see some strength, and that is why we see it coming back to Rs 46-47 to a dollar.
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