India’s Prime Minister Manmohan Singh (who has a PhD in
Economics from Oxford) finally offers his formal comments on recent rupee exchange
rate volatility:
It is actually a pretty good analysis of the economic situation facing India. Here are a few
highlights:
“The movement of the
exchange rate of the Rupee recently is a matter of concern to the
government. The Rupee has depreciated
sharply against the dollar since the last week of May. There are concerns, and
justifiably so, of the impact this would have on our economy.
What triggered the
sharp and sudden depreciation was the markets’ reaction to certain unexpected
external developments. On May 22, 2013, the US central bank indicated that it
would soon ‘taper’ its quantitative easing as the US economy was
recovering. This led to a reversal of
capital flows to emerging economies which are now sharply pulling down not just
the Rupee, but also the Brazilian Real, the Turkish Lira, the Indonesian Rupiah,
the South African Rand and many other currencies.
While global factors
such as tensions over Syria and the prospect of U.S. Federal Reserve tapering
its policy of quantitative easing have caused general weakness in emerging
market currencies, the rupee has been especially hit because of our large
current account deficit and some other domestic factors. We intend to act to
reduce the current account deficit and bring about an improvement in the
economy.
In 2010-11 and the
years prior to it, our current account deficit was more modest and financing it
was not difficult, even in the crisis year of 2008-09. Since then, there has
been a deterioration, mainly on account of huge imports of gold, higher costs
of crude oil imports and recently, of coal. On the export side, weak demand in
our major markets has kept our exports from growing. Exports have been further
hit by a collapse in iron ore exports. Taken together, these factors have made
our current account deficit unsustainably large.
Clearly we need to reduce
our appetite for gold, economise in the use of petroleum products and take
steps to increase our exports.
…
Coming back to the
effects of the Rupee depreciation, we must realise that part of this
depreciation was merely a needed adjustment. Inflation in India has been much
higher than in advanced economies. Therefore, it is natural that there has to
be a correction in the exchange rate to account for this difference. To some
extent, depreciation can be good for the economy as this will help to increase
our export competitiveness and discourage imports.
There are many sectors
which are regaining competitiveness in export markets as a result of the fall
in the exchange rate. Over the next few months, I expect the effects of this to
be felt more strongly, both in exports and in the financial position of exporting
sectors. This in itself would correct the current account deficit to some
extent.
However, foreign
exchange markets have a notorious history of overshooting. Unfortunately this is what is happening not
only in relation to the Rupee but also other currencies.”