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Business News/ Opinion / Online Views/  Too early to celebrate on rupee, current account deficit

Too early to celebrate on rupee, current account deficit

The jump from despondency to euphoria after relief rallies in Indian stocks and the currency is unwarranted

India has a lot of work to do before it can breathe easy on the rupee, on the evolution of the current account deficit and its funding. Photo: Pradeep Gaur/Mint (Pradeep Gaur/Mint)Premium
India has a lot of work to do before it can breathe easy on the rupee, on the evolution of the current account deficit and its funding. Photo: Pradeep Gaur/Mint
(Pradeep Gaur/Mint)

The kind of commentary that has greeted the arrival of Raghuram Rajan at the Reserve Bank of India (RBI) betrays the absence of serious thinking in the country. He might have warned of financial sector imbalances in the world but I do not think he would have predicted that India would greet his arrival with commentary that is blatantly sexist. Imagine the reaction that would have awaited male journalists writing about a good-looking lady governor at the central bank. There is far too much of escapism and denial on display. That is why most commentary has jumped from being despondent to euphoric on a fortnight of relief rally in Indian stocks and the currency. Market prices often overshoot on either side before settling down in the middle.

For example, the government reported that the Index of Industrial Production (IIP) rose in July by 2.6% year-on-year and the decline in June was revised down to -1.8% from the previously reported -2.2%. In terms of sectors, manufacturing and electricity output went up in July while mining output contracted. According to use-based classification, capital goods led the output improvement in July with a gain of 15.6%. This was due to a category called “Electrical Machinery and apparatus" that has a weight of about 2% in the overall IIP. It jumped to 573.9 from 312.5 in July last year! One of the products that made a specific contribution to this category is “Insulated Rubber Cables". The production of this item jumped 336% year-on-year. Production of ayurvedic medicaments and vitamins jumped on an annual basis. Certainly, none of these are signs of sustainable turnaround in industrial production, in areas where they matter.

Certainly, such euphoria did not cloud the thinking at the Prime Minister’s Economic Advisory Council. On Friday the 13th, the council revised down its growth estimate for the current financial year (2013-14 that ends in March 2014) from 6.4% to 5.3%. It is still too high. Growth risks are firmly tilted to the south of this estimate. Some economists are pencilling in growth estimates that are slightly above 4%. They are more realistic. It is wrong to say that India’s high savings rates preclude a low growth outcome for a long period. That is wrong.

Japan has a national savings rate of about 20%. Its nominal gross domestic product (GDP) growth is barely in positive territory. Of course, Japan has an ageing population. But, India has a young population that is underprepared and underequipped to shoulder the burden of meeting its own and the country’s high growth aspirations. Further, India’s savings could be deployed for wasteful purposes. The government corners a lot of the savings for its wasteful expenditure. The food security Bill is an example of that. Then, some of its legislations also come in the way of capital being deployed quickly and generating output. The land acquisition Bill is an example of that.

In other news, RBI constituted an expert committee to recommend a new monetary policy framework under the leadership of the deputy governor, Urjit Patel. The committee is expected to recommend measures to revise and strengthen the monetary policy framework including improving its transparency and predictability.

It is also expected to recommend an appropriate nominal anchor for monetary policy. It is also an interesting question if the remit of the committee to come up with a nominal anchor for monetary policy also gives the game away. In other words, the decision might well have been made already on an inflation target for monetary policy.

That too would be unfortunate since financial system instability arises from multiple sources and, in fact, the least from the rate of inflation in goods and services. Hence, Baretalk confesses to certain uneasiness on seeing these terms of reference for the committee although he readily admits that it is too early to pass judgement. One can (and hopes to) be very wrong on these things.

The US dollar closed trading at 62.85 on Monday, having peaked at 68.82 on 28 August. It might be some time before the US dollar trades higher against the Indian rupee. Certainly, the decision by Larry Summers to withdraw from the race for the chairmanship of the US Federal Reserve Board is negative for the US dollar.

His withdrawal is a defeat for intellectual openness as he has been prejudged before the confirmation hearings are over. He might have brought a fresh perspective on the goals and process of monetary policy in the US.

One will hear the US Federal Reserve this week trying to offer market plenty of assurance that interest rates would remain in the narrow corridor of 0.0% to 0.25% almost indefinitely. But India has a lot of work to do before it can breathe easy on the rupee, on the evolution of the current account deficit and its funding. It is not only early but also wrong to celebrate.

V. Anantha Nageswaran is the co-founder of Aavishkaar Venture Fund and Takshashila Institution. Comments are welcome at To read V. Anantha Nageswaran’s previous columns, go to

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Published: 16 Sep 2013, 07:20 PM IST
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