The government must send a clear signal to foreign investors that it will stick to the fiscal deficit target of 3.3% of GDP in 2018-19 despite the 2019 general election and desist from populist moves like fuel tax cuts, they say.
As Prime Minister Narendra Modi is huddling with key economic policymakers on Saturday to ascertain if and what interventions are needed in the wake of the rupee’s slide and the rising prices of fuels, several economists suggest the government and the central bank manage the currency’s volatility more aggressively but caution against pressing the panic button and band-aid solutions, as these would only encourage currency manipulators to further exploit the situation.
The government must send a clear signal to foreign investors that it will stick to the fiscal deficit target of 3.3% of GDP in 2018-19 despite the 2019 general election and desist from populist moves like fuel tax cuts, they say. Saturday’s meeting, to be attended by finance minister Arun Jaitley, NITI Aayog vice-chairman Rajiv Kumar, PMEAC chairman Bibek Debroy and finance secretary Hasmukh Adhia, is expected to discuss options such as NRI bonds to prop up the rupee, apart from asking the RBI to intervene in the market, according to official sources.
Pronab Sen, former chairman of the National Statistical Commission, however, said many NRIs had in the past grabbed cheap loans in dollars and parked in India to take advantage of the 200-300 basis points difference between the interest rate on NRI bonds and the rate at which they borrowed.
The government, he said, should expedite goods and services tax (GST) refunds, address rural distress and take concrete steps to boost jobs. Many economists who FE spoke to said efforts must also be made urgently to boost exports to earn more dollars and contain the trade and current account deficits. They felt that an unflinching commitment to fiscal consolidation would boost confidence of foreign investors and minimise instances of volatility as witnessed in the foreign portfolio flows recently, although capital outflows are bound to be recurrent phenomenon. The surplus in capital account was just $5.2 billion in Q1FY19 as against $27 billion in Q1FY18 and $25 billion in Q4FY18.
Arguing that the rupee’s depreciation to 72-73, while a little over-blown, is far from a crisis-like situation, some economists said the domestic currency remained stable and over-valued for long and it was time for a natural correction. DK Joshi, chief economist at Crisil said, “The rupee is a little overblown now, which is temporary. The government doesn’t need to do something special except to curb volatility. It should stick to deficit targets and spell out clearly how it implements (crop) MSP programmes.”
Bank of America Merrill Lynch chief economist Indranil Sengupta has argued that a $30-35 billion issuance would change investors’ perception of the rupee and help stabilise it. He said that all the three NRI issuances (1998, 2000 and 2013) had staved off contagion in the past.
GST refunds must be expedited so that the working capital of firms, especially MSMEs, doesn’t get blocked. Better institutional mechanisms must be created to higher crop prices to farmers and address “rural distress”, as limited procurement through only FCI or state agencies won’t suffice. At the same time, more employment opportunities need to be created to help consumption grow.
Saugata Bhattacharya, chief economist at Axis Bank, said: “Fiscal prudence, high growth and RBI commitment to keeping inflation controlled and stable through its inflation targeting approach should send investors a loud signal on India’s macroeconomic stability.” Eventually, he said, the current concern on rising trade and current account deficits would moderate.
Many feel that the economy is now in much better shape than what it was in 2013. When the rupee hit 68.85 after the taper tantrum talks by the US Federal Reserves, the RBI was forced to launch the maiden NRI bonds and mopped up $ 34 billion with a three-year maturity. While there was a 23% fall in the rupee between January and August 2013, this year the drop has been over 12%. The fiscal deficit then was around 4.8% of GDP but the deficit was only 3.5% in 2017-18. CAD, too, was 3.4% then and only 2.4% now (in Q1FY18). Average crude oil price was over $100 per barrel in January to August 2013, while it was around $75 in the same time this year.
Although the GDP grew 8.2% in the first quarter of this fiscal, it was aided by a favourable base that is set to wane. The current account deficit, which exerts pressure on the rupee, is forecast to worsen to around 2.5% of GDP this fiscal, against 1.9% in 2017-18, mainly due to elevated oil prices. Foreign portfolio investors (FPIs) were net buyers of equity and debt last year, with net inflows of around $27 billion as of December 29 from a year earlier. However, they turned net sellers this year, with net outflows of around $7 billion up to August 31.
As for positives, although forex reserves have dropped from a record high of $426.08 billion as of April 13 to $400.1 billion as of August 31 on suspected intervention by the central bank to curb rupee volatility, these are still enough to deal with the current situation. Inflation hit a 10-month low of 3.69% in August, and although it is set to inch up again, it will likely remain within 4-5%.