On Tuesday the rupee closed below Rs 68 to a dollar, its lowest in over a year. It was not on account of a sudden, sharp drop. There has been a consistent slide since the beginning of the year. It has depreciated over 6% against the dollar since the beginning of the year, making it the worst performer among major Asian currencies. This slide is partly influenced by another trend: the steady rise in the price of crude oil over the last few months. These two developments highlight, once again, India’s macroeconomic vulnerabilities and the need to mount a vigil.
India’s merchandise trade deficit in 2017-18 was $156.83 billion, the highest in the last five years. This is worrisome because five years ago, oil traded at around $100. This suggests that India’s problems are not just linked to the price of crude. They also arise from poor performance in exports at a time when the global trade environment has been favourable. The Indian economy has a competitiveness problem, and we cannot be in denial any longer.
Emerging markets are perhaps going through the most challenging phase since mid-2013. The US is rolling back its loose monetary policy and interest rates there are hardening. Consequently, there is reallocation of foreign portfolio investment, roiling financial markets. In India, interest rate trends in the money market indicate that RBI’s policy of lowering interest rate has perhaps ended. Therefore, a combination of factors is likely to nudge up interest rates just when the economy has shown discernible signs of recovery after a slowdown in 2016-17. Policy tools to insulate the economy against the current volatility are limited as developments in US and geopolitical tensions spill over.
India’s economic policy makers, however, can do some things to mitigate the fallout of this volatility. Increasing populism on the part of state governments will harm the economy. For example, the first decision of Karnataka’s new chief minister BS Yeddyurappa was a farm loan waiver. Given BJP’s political dominance, it’s important the Centre should restrain state governments from overreaching. One of NDA’s achievements has been prudent fiscal management. It’s all the more important to stick to it when the global situation turns adverse. Alongside, both Centre and states need to urgently dismantle barriers to doing business. This will boost India’s exporters and also help the macroeconomic situation.
via Rupee’s free fall: India’s macroeconomic vulnerabilities increase in an adverse global environment