Orbis Economics' Top 3 posts of 2011

Orbis Economics’ blog in 2011 has continued to touch upon various aspects of the Indian macro-economy such as growth, external sector and issues of global significance. This post lists the ones that the readers most read, in descending order:

#1. India GDP: No surprise, strong takeaways nevertheless

The year has been challenging for India, to say the least. Fraught with high inflation, high interest rates, slowing domestic growth, weak global environment, and potentially high fiscal deficit in the year; the post was the most read of all as growth tumbled below 7%. Orbis Economics argues that the growth trends highlight two policy aspects – our need to tackle inflation differently and allowing more investments into the economy.

#2. Eye on the World Special: The Unrest Economies-Reasons and Implications

The post aimed at capturing some economic realities of the countries in the MENA region that saw the eruption of the most unprecedented protest across countries. Orbis Economics also brought out a research paper on the theme earlier in the year. It is available on the Social Science Research Network, and can be downloaded here.

#3.  Can we relax about the rupee, please!

The recent months have seen a sharp depreciation in the rupee owing to a combination of domestic and global factors. Orbis Economics maintains that while there is indeed risk to the currency, fears of a ‘crisis’ at the present point of time could be overblown. 

Whither, rupee?

I recently received an e-mail, relevant parts of which are reproduced below:

“I bought USDs in the range of Rs 45 to 47 & hoped that the situation would improve in the days to come ...

However, the situation seems to be worsening everyday....

I only want to understand whether this is a temporary phenomenon and some measure by RBI will bring things under control..or there is is some other factor behind this...

Please help me get over the anxiety.”

First of all, many thanks for your e-mail. I really appreciate your writing in.

For you, and all my other friends who have expressed interest in knowing more about the rupee, here are some of my thoughts.

I was and continue to remain a rupee bull, at least in the medium to long run. For proof, click on this link.

There are of course short-term risks in the present turbulent economic scenario, but there are factors that could still result in rupee continuing to edge upwards. These are:

1.    RBI intervention – The central bank has finally stepped in to curb the depreciation in the rupee. While the rupee is unlikely to bounce back with a vengeance anytime soon, this is indeed a stabilising factor.

2.    Monetary easing ahead – Indian companies have been facing the twin challenges of rising cost of capital and rising raw material prices. A poor global environment has not helped either. It is no surprise that pockets of production in the economy have shown sharp slowdown. However, the days of monetary tightening seem to be behind us now, and the RBI is expected to start cutting rates in 2012, particularly now as food inflation is declining. This will be a shot in the arm for FII flows, which have hit a 3 year low recently.

That said, risks to the rupee are increasingly present as well:

1.    The euro zone situation remains the one mammoth risk factor to the rupee. There is no way of knowing right now, which way the wind will blow on this. Though realistically speaking, it is likely that there are both ups and downs to be expected over the next year.

2.    Slow moving policy, such as that on FDI, could continue to be another dampener for overseas funding waiting to come into India.

How these factors bounce off against each other will be crucial in determining the rupee direction. But while pessimism is in vogue these days, there is room for an appreciation from here too.

Can we relax about the rupee, please!

The rupee’s steep fall downhill has sent alarm bells ringing, with the word ‘rupee’ and ‘crisis’ often being heard and read in the same breath. It is true that the pace of depreciation has been steep and it is in part a reflection on India’s weakening economy.

But is it a genuine ‘crisis’? Perhaps not – and for three quick reasons:

• Forex reserves – Traditionally, RBI should have 3 months import cover as reserves. At present the reserves are far in excess of that. In other words, India is nowhere close to such dire straits right now.
•  Exports growth - Currency depreciation is actually salutary for exports. And has a negative impact on imports. Result – a few months down the line, we might actually witness a shrinking in trade deficit. For all those who have been worried about India’s trade deficit, this should be reason to cheer.
• Incomplete correlation with domestic economy – While there is no doubt that the Indian economy is showing signs of cooling off (the latest IIP number for October has shrunk miserably), it is more likely a reflection of global economic uncertainty. It is unlikely that the rupee would have depreciated at this rate in a stable global climate.

That said, the situation is still unresolved. It is likely that it may resolve as soon as it appeared, or it may not. So while an eye needs to be kept on its development, it is too soon to start giving out verdicts.