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Depreciation of Indian rupee can affect India’s economy: Indian PM

Indian prime minister Manmohan Singh.
Indian prime minister Manmohan Singh.

Concerned over depreciation of Indian rupee, Indian Prime Minister Dr Manmohan Singh Friday said there are justifiable concerns that it would have an impact on India’s economy.

New Delhi, Aug 30/Nationalturk – Terming depreciation of Indian rupee as a matter of concern, Indian Prime Minister Dr Manmohan Singh Friday said there are justifiable concerns that it would have an impact on India’s economy and advised people that there may be short term shocks to the economy and they need to face it.

“The movement of exchange rate of Indian Rupee recently has been a matter of concern. The Rupee has depreciated sharply against the dollar since last week of May. There are concerns, and justifiably so, of the impact this would have on our economy,” Singh said while addressing country’s lawmaker in Lok Sabha, upper house of Indian parliament today.

He said what triggered the sharp and sudden depreciation was the markets’ reaction to certain unexpected external developments. “On May 22, 2013, the US Federal Reserve Bank indicated that it would soon ‘taper’ its quantitative easing as the US economy was recovering. This led to a reversal of capital flows to emerging economies which are now sharply pulling down not just the Rupee, but also the Brazilian Real, the Turkish Lira, the Indonesian Rupiah, the South African Rand and many other currencies.”

‘India rupee hit because of large current account deficit’

Maintaining that global factors such as tensions over Syria and the prospect of U.S. Federal Reserve tapering its policy of quantitative easing have caused general weaknesses in emerging market currencies, Singh said, “Indian rupee has been especially hit because of our large current account deficit and some other domestic factors. We intend to act to reduce the current account deficit and bring about an improvement in the functioning of our economy”.

“In 2010-11 and the years prior to it, our current account deficit was more modest and financing it was not difficult even in the crisis year of 2008-09. Since then, there has been a deterioration, mainly on account of huge imports of gold, higher costs of crude oil imports and recently, of coal. On the export side, weak demand in our major markets has kept our exports from growing. Exports have been further hit by a collapse in iron ore exports. Taken together, these factors have made our current account deficit unsustainably large,” he said.

The Indian PM said it is clear that they need to reduce our appetite for gold, economise in the use of petroleum products and take steps to increase exports.

“We have taken measures to reduce the current account deficit. The Finance Minister has indicated that it will be below $ 70 billion this year, and we will take all possible steps to ensure that outcome. These are already showing results with a declining trade deficit in both June and July,” he said.

“We are confident that we will be able to lower our current account deficit to $70 billion. Our medium term objective is to reduce the current account deficit to 2.5% of our GDP. Our short term objective is to finance the current account deficit in an orderly fashion. We will make every effort to maintain a macro economic framework friendly to foreign capital inflows to enable orderly financing of the current account deficit,” he said.

‘Inflation in India higher than advanced countries’

Referring to effects of Rupee depreciation, Singh said, “We must realise that part of this depreciation was merely a needed adjustment. Inflation in India has been much higher than in the advanced countries. Therefore, it is natural that there has to be a correction in the exchange rate to account for this difference. To some extent, depreciation can be good for the economy as this will help to increase our export competitiveness and discourage imports”.
“There are many sectors which are regaining competitiveness in export markets as a result of the fall in the exchange rate. Over the next few months, I expect the effects of this to be felt more strongly, both in exports and in the financial position of exporting sectors. This in itself would correct the current account deficit to some extent,” he said.

He said foreign exchange markets have a notorious history of overshooting. “Unfortunately this is what is happening not only in relation to Indian Rupee but also other currencies.”

‘India not contemplating capital control’

PM Singh said India’s Reserve Bank of India and Indian government have taken various steps to stabilize Indian rupee. “Some measures have given rise to doubts in some quarters that capital controls are on the horizon. I would like to assure that Indian Government is not contemplating any such measures. The last two decades have seen India grow as an open economy and we have benefitted from it. There is no question of reversing these policies just because there is some turbulence in capital and currency markets”.

He said sudden decline in exchange rate is certainly a shock, but they will address this through other measures, not through capital controls or by reversing the process of reforms.

‘Ultimately, the value of the rupee is determined by the fundamentals of our economy. While we have taken a number of actions to strengthen those fundamentals, we intend to do more,” he said.

Singh further said the easy reforms of the past have been done. “We have the more difficult reforms to do such as reduction of subsidies, insurance and pension sector reforms, eliminating bureaucratic red tape and implementing Goods and Services Tax. These are not low hanging fruit and they need active political consensus.”

“There may be short term shocks to our economy and we need to face them. That is the reality of operating in a globalised economy, whose benefits we have reaped over the last 15 to 20 years. We will need to ensure that the fundamentals of the economy remain strong so that India continues to grow at a healthy rate for many years to come. That we will ensure. We are no doubt faced with important challenges, but we have the capacity to address them. It is at times like these that the nation shows what it is truly capable of,” added Indian PM.

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Faiz Ahmad / NationalTurk India News

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