MUMBAI: India’s currency plunged to a new lifetime low against the dollar and shares tumbled on Monday even as the World Bank’s chief economist said the country’s problems were “overplayed”.
Kaushik Basu said India was not in danger of a full-blown economic crisis, despite Asia’s third largest economy struggling with a gaping current account deficit that has helped push the rupee to lifetime lows.
“Growth may not have bottomed out. We may have further to go (down), but the situation is not as bad as is being captured by the mood and captured in the headlines,” Basu said in New Delhi.
Basu, himself an Indian and a former chief adviser to the finance ministry, said things were very different from 1991 when India had to seek a bailout from the International Monetary Fund in what was considered a national humiliation.
“India is nowhere near the 1991 crisis. The gloom is being overplayed,” he told a business audience.
“In 1991 we had foreign exchange reserves ultimately for 13 days of imports, we now have enough for seven months.”
“There is no comparison. I don’t think we are anywhere near that situation. We are a much stronger economy than in 1991.”
The partially convertible rupee, Asia’s worst-performing major currency this year, fell 2.3 percent, the sharpest single-day decline in years, to 63.22 rupees to the dollar in trade Monday on concerns about the slowing economy.
Shares, which fell nearly four percent on Friday, plunged over two percent before retracing some losses to close down 1.56 percent at 18,307 points.
India’s 10-year benchmark bond hit a five-year peak of 9.17 percent, reflecting eroding investor appetite for Indian debt as worries about the economy and potential default mounted.
Basu said India’s economy — even with 4.8 percent annualised growth in the quarter to March — was among the world’s fastest-growing.
He urged people not to fall into a “spiral of pessimism”.
In the long run the crux of India’s problems lie with issues such as “governance, bureaucratic efficiency, the business ethos”, Basu said.
“The countries that have done well historically… they have managed to clean up their business ethos” so nobody has to pay bribes to get tasks done, he said.
Corruption has long been a central issue in India and the Congress-led government has been racked by a string of graft scandals that have alarmed foreign investors.
Basu and analysts urged the central bank to use its foreign exchange reserves to curb turbulence in the rupee. The central bank has been sparing in its use of reserves to defend the currency.
If India bank indicated its “number one initial priority is to stabilise the rupee… I suspect it would go a long way to calming the situation,” said Credit Suisse economist Robert Prior-Wandesforde.
But Basu said India should “not try to buck the trend of the exchange rate”.
“If you deny the laws of the market, you will come to grief,” he said.
As of Monday, the rupee had fallen over 14 percent against the dollar this year, closing at 63.14 against the US unit.
Last week, in the latest of a series of steps to prop up the currency, the central bank spooked investors when it tightened controls on the amount of money Indian firms and individuals can send abroad.
The move has been criticised as a disturbing throwback to before the country unleashed its economic liberalisation drive in the early 1990s, when Indians’ access to foreign exchange was strictly limited.
In the past few weeks, policymakers have raised short-term interest rates, announced plans to let state firms raise foreign funds abroad, and curbed gold imports to narrow the deficit and stabilise the rupee.
Analysts have dismissed many of the moves as “firefighting” that do not address reforms needed to put the economy on its feet.
In its latest initiative, the government announced late Monday it had decided to “disallow import” of duty-free flat screen TVs by airline passengers as part of their personal luggage.
Emerging-market currencies have been hit by expectations the United States will roll back massive stimulus measures responsible for huge inflows of foreign investment into developing countries.
India relies on foreign capital to fund its record current account deficit. But since June 1, overseas funds have pulled out $11.58 billion from India’s stock and debt markets.
Basu said it might be good for the central bank to “go a bit easy on liquidity for the next nine months”, saying India may need a dose of economic stimulus.
“It could create the demand (in the economy) and burst that bubble of pessimism,” he said.
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