It would be too harsh to put that the Indian economy is facing one of the worse situation in the last 20 years .
The FT published a Misery, Indian edition Index indicating fears over policy ‘credibility’ could send the Sensex in such a spin on Friday — India’s benchmark closed down almost 4 per cent — and trash the rupee…according to them this isn’t the classic misery index — for India substituted industrial production for unemployment data, which are lacking — but it’s the first time in over twenty years that it has remained stuck at such a high level, they note.
The Reuters states that Finance minister Chidambaram tried to talk up the rupee on Friday after it plumbed another record low on concerns the Reserve Bank of India‘s (RBI) latest measures to defend the currency could be a step towards outright capital controls.
According to Bloomberg: The RBI cut the amount local companies can invest overseas without seeking approval to 100 percent of their net worth, from 400 percent, according to a statement on Aug. 14. Residents can remit $75,000 a year versus the previous limit of $200,000.
We cannot ignore the retreat across capital markets was exacerbated by escalating tensions with Pakistan.
According to The Times of India: – Using heavy calibre guns, Indian Army retaliated strongly after Pakistani troops on Thursday resorted to unprovoked and indiscriminate firing with rocket and mortar shell attacks at LoC posts in Jammu & Kashmir‘s Poonch sector that injured three Army jawans and a civilian.
This is the 11th ceasefire violation by Pakistan in the past five days, Army officials said.
As capital outflows continue, India is struggling to plug its widening current account gap (6.7% of GDP last year). This has become the worst economic crisis for the nation since 1991, when India’s government, faced with depleted foreign reserves, had to resort to asking the IMF for help. At the time, the country had secured a $2.2bn loan, backed by 67 tons of gold reserves. To satisfy the IMF’s concerns about access to the collateral, the RBI had to airlift 47 tons of gold to be deposited offshore with the Bank of England and 20 tons of gold with UBS.
While such action is unlikely this time around, if the crisis continues to escalate, Asia’s third largest economy will struggle to grow.There isn’t a policy available to the central bank which doesn’t involve pain somewhere else — raise short-term rates to shore up the rupee, risk long-term rates rising and hurting industrial growth; let the currency fall, and the poorest bear the brunt of high inflation. Hence why it might not be so easy to pick a policy and stick to it. Unless there’s something to Rajanomics…