In past couple of months RBI has taken some steps apparently aimed at stemming the slide in value of Indian currency (INR) against USD. These measures broadly target (a) liquidity in financial system to stem speculative demand for USD; (b) gold imports to control current account deficit; and (c) encouraging capital flows especially through causing debt yields to rise.
Though it may be little early draw any conclusion on the
efficacy of these steps in achieving the desired outcome; so far we have not
seen much impact. INR continues to be in Rs59-60/USD band and sentiments
continue to be bearish on currency.
However, there are many side effects that are manifesting in
various measures. For example, gold smuggling has reportedly
grown four fold in 1QFY14 as compared to the same period previous year. Rate
expectations have hardened substantially as reflected in failed OMO. Rate
sensitive sectors like financials, realty and capital intensive debt laden
infrastructure have seen massive erosion in their market value. Investors have
suffered heavy losses on their debt portfolios.
With cost of capital rising, the stress in financial system is
only expected to rise further. The investment climate shall remain challenging
for an extended period of time, especially when the political and executive
leadership of the country is mostly dysfunctional. Some recent surveys have
indicated that situation is not likely to improve in any substantial measure
even after general elections next year.
The milieu obviously is worrisome. Many analysts have drawn
comparison to the situation in 1990s that was marked by economic turmoil,
political instability, geopolitical tension, and global crisis. The
consequences were serious like prolonged bear phase in capital markets, virtual
collapse of banking system, high rates, inflation and slower economic growth.
The god part was serious economic and financial sector reforms.
In our view, we would be pretty fortunate if the situation turns
out to be like 1990s only. The nightmare is that we might end up travelling
back to 1965-1975 era. For example, consider the following:
(a) With
an onerous responsibility to provide cheap food to 800mn people, the food grain
trade may likely get nationalized at state level. Rationing, hoarding, black
marketing, restriction on interstate trade, crop mismanagement etc may stage
comeback. The trial is already on with the government setting up vegetable
shops in Mumbai.
(b) Unable
to manage stress, most power and commercial road projects could get devolved on
financial institutions and thus get nationalized.
(c)
With CAD worsening beyond control, import
restrictions, capital controls, and currency peg are implemented and smuggling
becomes profitable and fashionable. Gold smuggling is already back.
(d)
The Hindu rate of growth becomes norm. A couple
of days ago Montek Singh feared that 12th Plan growth may be under
5%.
(e)
With control over everything, the government
becomes most powerful leading to emergency like conditions. Misuse of CBI and
pressure on CAG shows the intent.
The only good part is that Bollywood will also get its themes like Roti Kapda aur Makan, Khoon Pasina, Deewar etc. back.
Thought for the day
“Men are nearly always willing to believe what they wish.”
- Julius Ceasar(100-44BC)
Word of the day
Dispositive (Adj):
Involving or affecting disposition or settlement.
(Source: Dictionary.com)
Shri Nārada Uvāca
LK Advani says BJP will make a new record in next general election.
The little bird murmurs that only record BJP as a national party has - 2 seats in 1984 elections!
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