Rupee to the rescue

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Dominique Dwor-Frecaut : Apr 25 2008, 23:14 IST

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The global backdrop to the RBI decision next week seems one of increasing risks for emerging markets and for India. Last month, global markets went close to dislocation when US investment bank Bear Stearns went bankrupt. The ongoing US recession suggests India’s strong export performance is unlikely to last. And the seemingly endless dollar depreciation keeps alive the risk of major currency instability.

And yet, India’s FY08 export growth is likely to be above 20%; over the past nine months of record high global market volatility, India’s forex reserves have increased by $83 billion; and economic growth at 8.7% remains well above India’s historical average.

This suggests the global economic environment may not be as negative for India as feared. In fact, recent data and economic news suggests the global economy is creating more downside risk to India’s domestic demand than to external demand.

India’s remarkable export performance is supported by a major realignment of global economic forces. Emerging markets are becoming the main drivers of global economic growth and trade. According to IMF data, starting in 2003 emerging markets have accounted on average for about three quarters of global growth, largely supported by the commodities price boom. And this time around, according to a recent IMF study, emerging markets have become better able to leverage higher commodities prices to support higher investment and growth. According to the IMF, this is largely due to an improvement in the quality of economic management and business

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