As rupee bleeds, economic policy uncertainty rears its head again2 min read . Updated: 10 Sep 2018, 06:48 AM IST
India's economic policy uncertainty index surged to the level of 80 in August. This is the highest seen, so far, in 2018
India’s economic policy uncertainty index surged to the level of 80 in August. This is the highest seen, so far, in this calendar year. The economic policy uncertainty index was constructed by three US-based economists—Scott Ross Baker, Nick Bloom and Steven J. Davis—and tracks the general state of the economy as it relates to businesses. It can include broad economy-wide conditions or specific economic conditions of a particular industry. An important factor driving it northward may well be the continuously tumbling rupee.
In the last one month, the Indian currency has depreciated by 4%, higher than many other Asian currencies, which have fallen by around 1-3%. On a year-to-date basis, the rupee is among the worst-performing Asian currencies and is down 13% against the dollar.
While the strengthening greenback is a primary reason for the rupee’s fall, other factors such as surging global crude oil prices, which do not augur well for India’s fiscal position and a spike in bond yields are weighing on the rupee. It should be noted that the shortfall in goods and services tax revenue collections has already aggravated India’s fiscal concerns.
Some currency analysts expect the government to stem the rupee’s fall by issuing foreign currency bonds, while others expect the Reserve Bank of India to raise interest rates or bring in a scheme for higher-yielding NRI deposits, as has been done in the past.
“It (RBI) will thus have to decide, sooner or later, between 1. hiking rates to kill already weak growth and compress the current account deficit or 2. augmenting FX reserves by raising US$30-35bn of NRI bonds to stabilize INR without hurting growth," said a Bank of America Merrill Lynch report dated 6 September. NRI stands for non-resident Indians.
No wonder then that the economic policy uncertainty in India is on an upswing.
Meanwhile, the global policy uncertainty index declined from a 15-month high of 212.45 in July to 180.87 in August.
But this moderation in the index should be taken with caution. That’s because fears of a full-fledged trade war still loom and the ongoing turmoil in emerging market currencies casts a growing shadow on the global economy.
The chart shows the correlation between global and Indian economic uncertainty. Key global events scheduled in September include the Bank of England (BoE) and European Central Bank (ECB) meetings next week. While no tweaking of rates is expected from either of the banks, release of economic data points would be closely watched.
Further, the Organization of the Petroleum Exporting Countries (Opec) and non-Opec producers would meet on 23 September. However as per some media reports, the coalition has scheduled yet another meeting on 11 September in an attempt to form a new production strategy. This meeting is significant not only from the global perspective, but is also crucial for net oil importer India.
For investors in India, the 2019 Lok Sabha elections will also add to near-term economic policy uncertainty.