This week, the Indian currency hit a new low – the value of one US dollar is Rs 79.25. And forecasts place the price of a dollar at around Rs 82 before the end of the year. Characteristically, social networks are full of memes caricaturing the currency and its management. Dark humor apparently dulls the pain felt in the political economy. Politicians and celebrities are hounded with social media posts from the past. A meme that has gone viral on WhatsApp rolls out a Bollywood song using the US Dollar and Indian Rupee symbols – $un rahahinatu, ₹o rahahoon main!
The value of a currency has the powerful power to trigger national pride or dismay. 1991, 1997, 2002, 2008 and 2013 are all milestones of local dismay and global doubt – crises triggered by a combination of endogenous and exogenous factors. Bimal Jalan, a former governor of the Reserve Bank of India who led policy in the late 1990s, once observed that every economic crisis in India is actually a balance of payments crisis. Every five to seven years, India finds the rupee yoyo-ing from low to low. The term BoP, short for Balance of Payments, is a rather lackluster acronym for a condition that elicits emotions and even outrage. A country’s balance of payments, stripped of the algebraic impact of macroeconomic fundamentals, is essentially the balance between foreign currency obligations and earnings. India, which is a net importer, balances the gap between its export earnings and import payments with foreign direct investment inflows, foreign portfolio investments and the ever-reliable flow of remittances from Indians Abroad.
The balance of the sum of the parts is broken. There are a range of global factors. The end of the easy money regime in the United States triggered the flight to safety. In the first six months of the year, foreign portfolio investors sold stocks and debt worth more than $30 billion, or around Rs 2.9 lakh crore. Russia’s invasion of Ukraine has upset the balance between supply and demand in the food and energy markets.
India imports about 82% of its energy needs – the price of crude has risen from $75 a barrel to over $100 a barrel and that of coal has doubled from $240 a ton on February 25 to $412 a tonne. Exports are rising but the achievements are less than the rising cost of imports – going through the $25.6 billion gap in June, analysts estimate the trade deficit could well exceed 3% of GDP. There is no doubt about the global factors. What is disconcerting is the political procrastination. This column pointed to the end of easy money in December when US Federal Reserve Chairman Jerome Powell “retired” the “transitional inflation” phraseology. It would have been clear that interest rate hikes exhausting the interest rate differential and quantitative tightening would follow, paving the way for the erosion of competitive advantage. Still, the RBI did not find it necessary to raise rates until April.
On July 1, the government announced a one-off tax on oil producers and increased levies on gold imports. The steps are necessary but did the course correction have to wait so long. This week, the RBI, in a bid to bolster confidence in the currency, announced the raising of the investment cap for REITs in the debt markets and raised the permitted limits on external borrowing for Indian companies in addition to new standards allowing banks to take deposits from NRIs. Of course, the steps signal attention. However, the million dollar question is whether REITs would find it attractive to invest in Indian debt as the currency declines and interest rates rise around the world. Would companies increase foreign debt when the currency is expected to depreciate? Even as the market deliberates and debates, the moot point is this: did the RBI have to wait until July to take the necessary steps to support the rupiah when the implication of global rate hikes was known. What could have been the negative impact of moving earlier.
It is claimed that 2022 is different from 2013. Certainly the 2013 crisis was aggravated by political paralysis. That said, the macroeconomic fundamentals – the level of debt, the budget and current account deficits – deserve attention. It is true that the foreign exchange reserves are higher at around 600 billion dollars. Likewise, scale could be better deployed and leveraged. The fact that other currencies have held up less well is no consolation given the specter of peril.
On Friday, it is clear that the next US Fed hike will be 75 basis points and the Fed rate could well cross 3.5% by 2023. As rates rise, growth will stagnate. The narrative moved from stagnation to recession. This will impact capital flows to emerging markets and global trade. Yes, India is expected to grow the fastest, but this is an estimate with caveats. This requires scenario modeling for a range of options.
What’s troublesome is that the approach in 2022 looks just as responsive as in previous years, even as the economy has evolved in scale and complexity. Insufficient attention and inappropriate strategy have economic and political consequences. An economy approaching the five trillion GDP mark and positioned to be the third largest in a decade needs a modern playbook aligned with its aspirations. India can do better.
Author of The Gated Republic, Aadhaar: A Biometric History of India’s 12 Digit Revolution, and Accidental India