Meanwhile, economy | The Indian Express

While national attention is on Karnataka, it is important not to lose sight of the growing headwinds facing the economy. The most significant is, of course, oil. Brent crude is now almost at $80 per barrel, a level last seen in October 2014. The second is capital outflows from emerging market economies (EME) on account of rising interest rates in the US; 10-year government bond yields of 3.1 per cent there are at the highest since July 2011. Both have profound implications for India. Low global oil prices helped slash the country’s current account deficit from $88.16 billion in 2012-13 to $15.30 billion in 2016-17.

That number is likely to have touched $ 50 billion in 2017-18 and could cross $75 billion if oil continues to rule firm. As for capital outflows, foreign portfolio investors have since April made over $4.9 billion worth net sales of equity and debt in Indian markets, even as the RBI’s forex reserves have depleted by $5.6 billion during this period.

All this has impacted the rupee, which, on Tuesday, fell to a 16-month low of 68.11-to-the-dollar. The rupee has, indeed, been the worst-performing currency of late after the Argentine peso, Turkish lira, Brazilian real and Russian rouble. True, it hasn’t suffered a run of the sort seen during the “taper tantrum” days of May-August 2013. But that period, too, was marked by capital outflows from EMEs triggered by the US Federal Reserve signaling a reversal of its ultra-loose monetary policy stance. While the Indian economy isn’t as vulnerable today as it was then, the lessons from that debacle shouldn’t be forgotten.

What are those lessons? Well, the most obvious one is not to put macroeconomic stability at risk. The Narendra Modi government’s record on that front has been quite impressive so far. With general elections less than a year away, there will be pressures for loosening fiscal purse strings and hiking minimum support prices for crops without giving a thought for its attendant inflationary consequences. Succumbing to these would not just erode the gains of the last four years, but also invite retribution from the markets — more so in today’s volatile global economic environment.

Current 10-year Indian government bond yields, at 7.9 per cent, are already higher than the 6.7 per cent levels of a year ago. Any threat of fiscal slippages could push yields even higher, besides provoking further capital outflows. High interest rates and a rupee in free fall is something that will be a disaster — both for the economy and the ruling party.

via Meanwhile, economy | The Indian Express

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s