Column: What has changed since Sept?

Jan 15 2013, 03:09 IST
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SummarySeptember 2012 could be defined as the watershed month in the current fiscal.

A raft of reforms has lifted market sentiment, stabilised the rupee and curbed imported inflation

September 2012 could be defined as the watershed month in the current fiscal. The government announced a series of reforms to pull back the economy from the brink and, till date, such an endeavour is well and truly on. In between, a raft of macro numbers have been released, and it seems that we may have just seen off the worst.

Let us start with the immediate impact of the measures announced by the government. There has been indeed an improvement in investor sentiment since September. Portfolio inflows during September-December 2012 aggregated close to $14 billion, which is slightly lower than $17 billion that flowed into India during the entire FY12! Such a huge rebound in capital inflows had a significant influence on the rupee value that pulled back from R57/$ to the current R54.5/$.

What is the impact of such rupee appreciation? First, the sobering impact on the oil import bill. Our estimates suggest that every one rupee appreciation in rupee value trims the oil import bill by 2%, all other things remaining unchanged. Interestingly, the rupee has depreciated from an average of R49/$ in FY12 to around R54.5/$ currently, a depreciation by roughly R5.5. Contrast this with the oil import bill that has climbed by 11% in the first eight months of current fiscal. Clearly, the increase in oil import bill has been mostly because of the rupee depreciation in the earlier part of FY13, and the current appreciating trend will mitigate the oil import bill to a significant extent. This could have a sobering impact on India’s current account deficit (CAD) that touched 5.4% of GDP in Q2FY13.

Second, the trends in imported inflation rates are important. Imported inflation that had touched 8.4% in September 2012 has now declined to 6.5% in November 2012. This will give RBI the much needed flexibility to look for a rate cut going forward.

Third, as per CMIE data, the number of stalled/shelved projects have come down marginally in the quarter ending December 2012. The number of stalled/shelved projects was 98 in quarter ending December 2012 (the corresponding figure last year was 173). What is also encouraging is that there has been a depletion of cash balances and inventory held by the manufacturing sector for the quarter ended September 2012.

We now turn to the fiscal position of the government, since many

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