Indian Rupee (INR) has again touched life time low at 62.00 against USD. The reasons are very obvious. Though RBI and government were taking measures to help support the INR but most of them were ill timed and lack necessary powers to convince the market that these are the potential solutions. This time is really different then in the past when we have faced similar foreign exchange crisis. Currently huge short term liability to the tune to USD 170 billion are going to mature in the current financial year. Accepted the fact that most of these will be rolled over as what we have witnessed in the past. However, these numbers are staggering and market is testing the resolve of the authorities and keep asking for show me the inflow of foreign currency.
Authorities are expected to understand the real cause of problem behind the latest persisting foreign exchange crisis. Let me outline them:
1. Global Factors : Indian markets were one of the beneficiary of the global quantitative easing since 2008, which has buoyed the equity and fixed income markets. Now, US growth is returning and thus it is expected that Federal Reserve would be scaling down purchases of securities gradually, which in tern reduce global funds available at ultra cheap rate.
2. Indian man made disaster : Policy paralysis and recent corruption has turned India into importer of certain products where we were either exporter like iron ore or net importer like coal. This has increased demand for foreign currency suddenly. Further consumption of imported consumer goods like electronic items, food products, fancy SUV cars etc. further added to the demand for foreign exchange. Obviously, authorities have turned nelson eye to these events & failed to recognize these shifts in the market. Thus, here we are facing the music and currency is falling.
Once federal reserve have made public its intention of withdrawing excess liquidity in near future, globally bond market & consequently local currencies fall down substantially as leveraged investors choose to move back to safe heaven and reduce risk. India which was recipient of global liquidity could not be left unscathed.
What is the solution... well, the real game changer would be shock and awe therapy. Authorities should come now with a realistic plan get at least USD 10 billion in the country within no time. This will only calm the market. In addition, government should not hesitate to take tough economic decisions like deregulating at least diesel & fertilizer price. Time has come to reduce subsidies and thereby reducing its consumption. Further, we should resolve that we have policies in place to improve our global competiveness so that exports can be encouraged. Markets are watching you...Please deliver before it is too late...
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