On BBC Business News last week, the presenter was talking about Turkish Lira , South African Rand and the Indian Rupee in the same breath. The context was the sharp fall of the Lira to record lows against the USD due to political issues and high deficits and the fall in the Rand due to weakness in growth and rising deficits to five year lows against the USD forcing the respective central banks to hike interest rates and intervene in the market to sell USD to stem the fall in value of the currencies.
The RBI had hiked the policy rate the repo rate last week as a part of a move to target the CPI (Consumer Price Index) inflation that is trending at levels of 9.87% as of December 2013. The Rupee had fallen to record lows against the USD in August 2013 before climbing higher by 10% on the back of RBI and government taking steps to lower fiscal and current account deficit, increase USD flows and tackle rising inflation expectations.
The question here is, Is the Rupee as bad as the Lira and the Rand or for that matter is it as bad as the Russian Rouble, Brazilian Real and Argentinian Peso? The Rupee is down over 40% against the USD over the last few years and that places the country amongst the worst performing currencies in the world. The fall in the value of the Rupee would suggest that India is one of the weakest economies in the world and is fit to be equated with much smaller and less robust emerging economies or with commodity price driven economies.
India is not as bad as it looks and is definitely much better off that most of its emerging market peers. True GDP growth pegged at 4.5% for 2013-14 is over decade lows while inflation as measured by the CPI is close to double digit levels, which is a big cause for worry. Rising fiscal and current account deficits have led to Rupee weakness.
In the eyes of a pure macro economist, India is clearly in the same league of other countries facing low growth, rising inflation, high deficits and weak governance. However India does stand out from the rest of the emerging market crowd, barring countries such as South Korea that are strictly not emerging markets in the sense of economic development.
Take for example the performance of the Sensex and Nifty in all the economic gloom and doom. The Sensex and Nifty are at close to record highs largely on the back of performance of well managed companies in the FMCG, IT, Banking and Pharmaceutical space. Wealth creators over the last five years include ITC, HUL, HDFC Bank, TCS, HCL Technologies, Asian Paints and Sun Pharma.
The equity market performance example is to highlight the fact that India has a vibrant private sector in diversified fields that can hold their amongst the best and biggest in the world.
The RBI has done an excellent job of regulating the banking system, which while reeling under baggage of bad loans (predominantly public sector banks) are still adequately capitalised and have enough liquidity reserves. India’s banks did not face the same fate as that of the global giants that had to be bailed out by governments in the 2007-08 financial crises.
India would also come out as a highly transparent economy where performance of the public and private sector is widely analysed and discussed. This is not the case with countries such as China where data is questionable and the government does not take criticism.
Countries such as Russia and China, while trying to embrace market economics are still not able to take the level of abrasiveness that markets exhibit when things go wrong. India on the other hand learns to deal with it rather than tie the markets hands. The government and the RBI are conscious of the INR weakness and have taken hard steps to stem the weakness such as curbing spending in an election year and raising interest rates at a time when economic growth is falling sharply.
FII’s too are finding India amongst the best of the worst given that equity flows have been extremely positive at USD 10 billion for fiscal 2013-14 year to data. FII’s have sold debt worth USD 8 billion this fiscal but that has largely been due to INR fall and rising bond yields.
India has a long way to go to address its macro issues but the fact that there is accountability to its stakeholders, there is more optimism than pessimism on the economy.