The Indian GDP in the first quarter of the financial year 2018-19 grew at an impressive 8.2% rate. And, the Indian currency depreciated about 13% — perhaps more than initially anticipated. But from an economist’s point of view, JP Morgan’s Jehangir Aziz wrote, the “brouhaha” surrounding high GDP growth and falling rupee was not understandable.
In a column this week in The Indian Express, Jehangir Aziz has busted the popular belief that Indian economy is protected by regulatory and capital controls and cannot be impacted by global trends. He said that the depreciation in the rupee was a result of simply the result of the economy (with the widened government deficit) adjusting through exchange rates as there was only modest monetary tightening and absence of support from fiscal policy.
“There is an entrenched and widespread belief among the same analysts and policymakers that India is a closed economy protected by its much vaunted regulatory and capital controls. Nothing can be further from the truth. Every time the world sneezes, India catches a cold,” Jehangir Aziz, chief emerging markets economist, J P Morgan wrote.
“When only one variable (exchange rate) has to do all the heavy lifting, the adjustment is usually outsized. And that’s what had driven the slide in the rupee. None of this is out of the ordinary. It is exactly what any Economics 101 textbook would say,” he said.
Jehangir Aziz argued that since the popular understanding is that India is a closed economy, rarely does the Reserve Bank of India (RBI) link its monetary policies to global interest rates even after shifting to an inflation-targeting framework. “Every budget document begins with a perfunctory paragraph on “global developments” but neither taxes nor expenditure has been changed in response to what has happened outside of India except when forced by crises,” he wrote.
Going forward, he opined, that the question is not whether India should respond to the falling rupee; the question is whether India can continue to not respond to global changes.