India Inc trails the Rupee

India Inc trails the Rupee

Indian rupee freefall could trigger investor flight

It is the kind of freefall that makes foreign investors jittery. As the rupee slumped to yet another record low of 68 to the dollar, there are growing fears that global investors may want a quick sale and exit from what has previously been touted as one of the world's most promising markets.

The Indian economy is caught in a whirlpool of sluggish growth and mounting fiscal deficit. Foreign capital could prove to be crucial in this scenario, but is proving to be worryingly elusive. Investors have withdrawn nearly $12 billion in shares and debt from India's markets since the beginning of June and in bond markets foreign investors have sold more heavily and outflows reached $4.5 billion earlier this year. One result is that Indian companies are now unable to plan for the future due to the constantly mounting import costs.

This year, the rupee has lost 20% of its value, acquiring the dubious distinction of being one of the world's worst-performing currencies. It has also been hit by fears that the US will scale back stimulus measures.

The Federal Reserve has said it will scale back its programme if the US economy improves, with some analysts expecting this 'tapering' to begin imminently. As a consequence, investors are pulling money out of emerging markets, including India, with the result that many of them are facing a financial disaster.

The Indian finance minister, P. Chidambaram, has insisted that the government would stick to its fiscal deficit target for the year and announced cabinet approval for power and infrastructure projects worth $28.4 billion. Amid scepticism, the government also claims it has set aside sufficient funds to also meet requirements under a new Food Security Bill which aims to provide subsidised food to millions of Indians.

India's own currency turmoil sits within a global uncertainty around possible military action in Syria that will only add to the world's woes in the coming months. The foremost concern remains that many foreign investors may not stick around to allow policymakers to get a grip on the situation.

Will US take new RBI governor seriously this time

As the man who had put his neck on the line by spelling out the prospects of a looming global financial crisis back in 2005, RaghuramRajan is exactly the man of vision needed to take over as the head of India's central bank.

The youngest-ever governor of the Reserve Bank of India was branded as 'misguided' by then-US Treasury secretary Lawrence Summers when, in a paper titled Has Financial Development Made the World Riskier , he was among a handful who dared to warn against a storm brewing in the financial services sector. Rajan also questioned whether banks had sufficient liquidity to cope, but was proved right when the US sub-prime crisis snowballed into a global economic slowdown.

Given this backdrop, the US and its acolytes are likely to take him more seriously this time as he tries to break the fall of the rupee. They should also take careful note of his background. Rajan has a considerable reputation as an economist and was the youngest-ever chief economist at the International Monetary Fund. Most recently, he was the chief economic adviser to the Ministry of Finance.

Rajan has equally good credentials as a diplomat. The central bank and politicians in India often fail to see eye to eye on currency matters, but there are hopes that he will bridge that gap more easily than his predecessors.

He takes charge of the monetary affairs of one of the fastest growing economies in the world at a time when it is perhaps at its most vulnerable. The rupee has been hit by a wave of selling since the US Federal Reserve announced earlier this year that it could soon begin to withdraw its monetary stimulus.

India will end the year with a current account deficit of around $85 billion. It may not be hurtling towards a major crisis but the pressure points for the new man in charge are many.

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