No need to panic, says Indian FM as rupee sinks near 15 vs Dh1

Industry head says remittances from NRIs need to be mobilised like never before

At 3.10am UAE time on May 16, 2012, the Indian rupee touched an all-time low of Rs14.83 against the UAE dirham (Rs54.50 vs. $1), giving in to constant pressure from oil importers, a weak economic forecast, and an uncertain investment climate.

With the Reserve Bank of India all but giving up efforts to contain the decline in the currency, India's Finance Minister yesterday said that the country will soon unveil austerity measures to aid the fiscal consolidation process.

However, instead of addressing the policy stalemate that has made foreign investors flee the country, the honourable minister blamed the situation on a 'foreign' hand.

While speaking in the Upper House of Parliament, Pranab Mukherjee said that the country's growth story was intact and that it was the eurozone crisis that was affecting the Asian markets. "There is no need to panic and the slide would be contained when there is certainty in eurozone recovery," Pranab said in Rajya Sabha.

On the other hand, a business body came out with much better explanations and suggestions to handle the crisis-like situation.

The government must look to entice Indian expats with higher interest rates and other investment sops in order for them to remit more money to help the beleaguered rupee, Assocham, an industry body said.

Making all-out efforts to motivate Indian expatriates to increase their remittances could provide a quick-fix to the mammoth problems staring the Indian economy in the form of a fast depreciating rupee under the impact of capital outflows from the stock market.   This was highlighted in a quick poll of bankers and economists conducted by the Associated Chambers of Commerce and Industry of ?India (Assocham).

“We will strongly recommend high-level teams comprising senior RBI officials, bank executive directors and chairmen and senior officials of the Finance Ministry doing roadshows in areas like the Middle East, South East Asia and Europe where there is a concentration of Indian expatriates. They must be given assurances, that given the global uncertainties, investing for them back home makes better business sense,” Assocham President Rajkumar Dhoot said.

The RBI said recently it had spent more than $20 billion in spot-market intervention between September and the end of February, but the moves have clearly failed to address the decline. "It's like popping Panadol to treat cancer," a Dubai-based Indian broker told Emirates 24/7.

"They have to address the root of the problem, which is policy paralysis and a growing fiscal imbalance. Treating the symptom is not going to achieve anything," shrugged the broker who did not wish to be identified.

The pressure on the Indian currency increases each time there is a percentage point drop in the share market benchmark BSE Sensex index, which is down almost 2,500 points, or more than 13 per cent, in the past three months.

“The outflows by the foreign institutional investors (FIIs) are not the result of only the so-called policy paralysis, but mostly because of risk aversion by the global investors into the equity markets,” Assocham said in a statement, citing results of its survey of 50 of India’s well-known economists and bankers, polled in the second week of May.

And the foreign institutions and funds would return with their sacks of cash after internal demand is generated and remains stable, or so believes Assocham.

“Once the internal demand is generated, the FIIs would return to the Indian markets which will soon have attractive valuations again,” Dhoot said.

“Unfortunately, there are no immediate solutions to these problems, but the country needs answers in the short term. We cannot afford the confidence to further decline. We need fast measures like somehow increasing the dollar inflows so that the pressure on the rupee is halted,” he said, adding that remittances from the non-resident Indians (NRIs) have to be mobilised like never before.

While a handful of banks have increased interest rates on the NRI deposits, these seem to be piecemeal efforts which need to be intensified. At present, NRI deposits are between $52 billion and $55 billion, which need to be pushed up to an ambitious level of $75-80 billion, he said.

“The NRIs should invest in India not only because of the motherland connection but also because India has a market of 1.20 billion people which will continue to grow,” Dhoot said.

NRI deposits in the country can be raised by at least $10-15 billion in the short term by taking confidence-building measures and offering attractive interest rates, the economists polled by the Assocham survey said.

At present, interest rates on different kind of dollar deposits range between 3 and 5 per cent, and the Reserve Bank of India has revised rules under which banks can offer three percentage points more than the LIBOR rates. However, the limit needs to be further raised, if more NRI deposits are to be attracted, economists felt.

The second solution offered by the experts participating in the poll was immediate efforts to revive internal demand. While moderating interest rates will send a strong signal and boost the consumer confidence, improving investment climate should be done without loss of time, they said.

New investment proposals, both in the public and private sector, dropped by 45 per cent between 2010-11 and 2011-12. This is something the country can ill-afford if it wants to retain the growth momentum of 7-8 per cent (getting back to 9 per cent growth trajectory in the short-to medium term is a Herculean task).

Both the RBI and the fiscal authorities, the Finance Ministry, have to move in tandem to ensure that expenditure is boosted so that the demand push is retained in the internal sector, even though the situation is worrisome in the external sector.

The situation is being worsened by weak global demand for goods and resultant impact on the services industry. There is an all-round pessimism amongst goods exporters and services exporters, mainly the IT majors, have given not-so-encouraging guidance for the financial year 2012-13. It is the US which is the market for Indian IT services and the signals are rather unclear as the American economy has shown slow signs of recovery, the Assocham statement added.

On top of it, said Dhoot, the elections climate in the US will increase heat on the protectionism, hurting the Indian outsourcing industry which is targeting revenues of $100 billion.

The situation in the Eurozone is alarming. In this area, merchandise exports would get more affected than the services. In any case, both have impact on India’s current account deficit, which is moving dangerously on the higher side, in excess of 4 per cent of the country’s GDP, reveals Assocham survey.

Exports decelerated in March by 5.7 per cent to $28.7 billion, the worst since 2009, while the import bill continues to be fuelled by high prices of  crude oil in a market which remains in the hands of well-organised speculators in the global commodity markets. Such a situation will exert pressure on India’s current account deficit, which has crossed 4 per cent of GDP.

Vicky Kapur

16 May 2012

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