Can Indian economy revive without favourable monetary dynamics and exchange rate?
I was reading the interview of Joseph Stiglitz and there was clear answer to this question. Emerging markets can afford to live with moderate inflation but not at the expense of tight liquidity, high interest rates and weak exchange rate. The reasons are obvious, these conditions will keep investor sentiments low and will remain as strong headwind to growth momentum. Now that there are clear signals of RBI easing its grip on firm monetary policy stance through rate cut now and shift into surplus system liquidity in due course (not later than first half of FY14), let us analyse the performance of rupee against the USD Index which gives clarity on rupee performance vis-a-vis the dollar and the peers. Let us not go a long way and look at rupee behaviour since July 2011.
1. USD Index was up from 73.42 to 84.10 (July 2011 to July 2012) post fiancial crisis in the Euro zone. The shift of investors to risk-off mode drove the dollar up by 14.5%. During this period, rupee was down from 43.85 to 57.32, down by over 30.5%.
2. Since July 2012 to September 2012, USD Index fell from 84.10 to 78.60, down by 6.5%. During this time rupee gained from 57.32 to 51.35, up by over 10%.
3. If we see end-to-end move from July 2012 till now; USD Index from 73.42 to current 79.10 and Rupee from 43.85 to 53, you can see that while USD Index is up by 7.75%, rupee is down by 21% i.e., fair value of rupee vis-a-vis dollar performance is some where around 47
4. Even if we take out the impact of domestic cues post FY13 Budget when rupee fell from 54.30 to 57.32, fair value of rupee is seen to be around 50.
It is also obvious that investors will not like to stay invested on a currency which underperforms against the dollar. The need therefore is to provide stability if not out-performance.
It is not rocket-science to understand that without bullish expectations on growth and domestic currency, it is impossible to have favourable macroeconomic environment to spur investments and capcity build-up to address supply-side bottlenecks, which is essential for moderate inflation. The need is to address inflationary issues through supply-pull and not by cutting demand-push.
The immediate need for the Indian economy is to move operative policy rate from current 8.0% into 7%; control rupee stability at 47-50 and gradually shift system liquidity from deficit 1% of NDTL to surplus 1% of NDTL. If all these can be achieved in the next 3-6 months, there is strong story ahead for the Indian economy.
Moses Harding
I was reading the interview of Joseph Stiglitz and there was clear answer to this question. Emerging markets can afford to live with moderate inflation but not at the expense of tight liquidity, high interest rates and weak exchange rate. The reasons are obvious, these conditions will keep investor sentiments low and will remain as strong headwind to growth momentum. Now that there are clear signals of RBI easing its grip on firm monetary policy stance through rate cut now and shift into surplus system liquidity in due course (not later than first half of FY14), let us analyse the performance of rupee against the USD Index which gives clarity on rupee performance vis-a-vis the dollar and the peers. Let us not go a long way and look at rupee behaviour since July 2011.
1. USD Index was up from 73.42 to 84.10 (July 2011 to July 2012) post fiancial crisis in the Euro zone. The shift of investors to risk-off mode drove the dollar up by 14.5%. During this period, rupee was down from 43.85 to 57.32, down by over 30.5%.
2. Since July 2012 to September 2012, USD Index fell from 84.10 to 78.60, down by 6.5%. During this time rupee gained from 57.32 to 51.35, up by over 10%.
3. If we see end-to-end move from July 2012 till now; USD Index from 73.42 to current 79.10 and Rupee from 43.85 to 53, you can see that while USD Index is up by 7.75%, rupee is down by 21% i.e., fair value of rupee vis-a-vis dollar performance is some where around 47
4. Even if we take out the impact of domestic cues post FY13 Budget when rupee fell from 54.30 to 57.32, fair value of rupee is seen to be around 50.
It is also obvious that investors will not like to stay invested on a currency which underperforms against the dollar. The need therefore is to provide stability if not out-performance.
It is not rocket-science to understand that without bullish expectations on growth and domestic currency, it is impossible to have favourable macroeconomic environment to spur investments and capcity build-up to address supply-side bottlenecks, which is essential for moderate inflation. The need is to address inflationary issues through supply-pull and not by cutting demand-push.
The immediate need for the Indian economy is to move operative policy rate from current 8.0% into 7%; control rupee stability at 47-50 and gradually shift system liquidity from deficit 1% of NDTL to surplus 1% of NDTL. If all these can be achieved in the next 3-6 months, there is strong story ahead for the Indian economy.
Moses Harding
No comments:
Post a Comment