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Decimal Digest
17 Jun 2013

Some musings on INR

When in the middle of last week the INR hit record low against USD, this author’s inbox was full of queries seeking some explanation on this sudden fall.

Timothy Taylor, a British Archaeologist once said, “An explanation of something that seems not to need explaining is good. If it leads further explanations of things that didn’t seem to need explaining, that’s better. If it makes a massive stink, …, it is one of the best.” It is in this spirit that I write the remaining piece.

Spanish Philosopher, José Ortega y Gasset has famously said “I am myself and my circumstances.” Since the Fed embarked on its journey in the wondrous QE-Land, INR had been driven by nothing but its circumstances – mainly dictated by the directions of Fed’s QE. The domestic fundamentals, which are decidedly getting worse every day, mainly due to either policy inaction or due to wrong policy focus, have played only momentary role in determining the value of the INR.

First, the domestic fundamentals – general government deficit for last three years averaged more than 8%, the consumer price rises for last five years have been about 10% (never mind the intellectually dishonest measure of WPI currently at 4%, touted by policy makers as evidence of slowing inflation), and finally the growth has markedly slowed recently to 5% a year from 8% a few years ago.

Things did not have to be so bad for India. India is currently adding 20-25% of all the global working age population. This unplanned bonanza has failed to turn India into a global growth driver, mainly due to faults of policymakers. I would leave elaborate discussions of policy errors to other commentators, while mentioning that even a broken clock shows the correct time twice a day. India’s central bank governor had to wait for 40 months for his predictions of (WPI) inflation coming true. This colossal lack of understanding of how the Indian economy operates has led to tremendous policy errors at all levels.

However, none of this mattered for the last three years, as the Fed, along with other developed world central banks, was busy sprouting new dollar bills at unprecedented rates. A tiny fraction of this newly minted money came to India, which covered all the policy related follies well.

Now, if the Fed follows through on market expectations of tapering down QE, fund inflows to India, along with other emerging markets, will be adversely affected. If that happens, funding the current account deficit & also repaying past debts is going to be a massive task on hand for India. The circumstances for India and the INR do not look good for the time being.


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