On the leeward side

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SummaryCan the Indian rupee and the economy withstand the current turmoil in the global economy?

Several emerging markets (EMs) are in crisis mode again. Argentina and Venezuela have been forced to devalue their currencies, the Turkish lira has depreciated against the US dollar, and so has the South African rand.

The rupee, on the other hand, is holding up relatively well so far. Recall the three tempestuous months for the rupee, from June to August last year? This was due to rising expectations of the United States Federal Reserve tapering its monthly purchase of bonds (“the taper”). India was one of the “Fragile Five” (Brazil, Indonesia, India, Turkey and South Africa): economies whose currencies were expected to weaken significantly when the taper eventually started.

This was attributed not just to their high current account deficits and dependence on foreign capital, but also because all of these economies are facing political uncertainty: all five are headed for elections this year. For India, most market commentators were talking of a recurrence of the currency crisis of 1991.

The taper started in December and, indeed, in the last three months, four of the Fragile Five currencies are down 10 to 15 per cent against the US dollar. The market capitalisation in US dollars for Brazil and Turkey are back to the lows seen in July-August last year. Even markets in South Africa and Indonesia have fallen close to their lows. However, the fifth, the Indian rupee, is down a mere 3 per cent, and total market capitalisation of the Indian markets is almost 30 per cent higher than the lows seen in August last year. The sense of crisis prevalent in markets like Argentina, Turkey and Brazil is therefore absent in India.

What has made India stand out thus far among emerging markets, and can the rupee and the economy withstand the current turmoil in the global economy? Of several possible reasons, there are only two that matter in my view: the first, a sharp decline in the current account deficit, and the second, the remarkable $34 billion that flowed in through the measures taken by the RBI towards attracting NRI deposits and banking capital. Both demonstrate the core strengths of India, despite all the negative publicity around unhappy corporations, noisy democracy and governments which act only with their backs against the wall.

India’s trade deficit has shrunk dramatically over last year, and by far the most among all emerging markets. From a monthly run rate of close to $17 billion in the

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