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Economy Aug 30, 2013

Why IMF thinks rupee fall poses challenges and opportunities for India

Washington: The unprecedented slide of rupees poses both challenges and opportunities for India, the International Monetary Fund (IMF) has said.

"The current situation presents a challenge, obviously, to the government of India, but also an opportunity for the government to continue in its policy efforts on a variety of fronts," IMF spokesman Gerry Rice said yesterday.

"I wouldn't want to speculate on any support or program needs," he said when asked on the speculation about India coming to the IMF, possibly selling its gold reserves to the IMF to prop up its currency.

"But maybe just stepping back on the situation in India, the combination of large fiscal and current account deficits, high and persistent inflation, sizable un hedged corporate foreign borrowing and reliance on portfolio inflows are longstanding vulnerabilities that have now been elevated as global liquidity conditions tighten, and this clearly has affected market confidence," Rice said in response to aquestion.



The US India Business Council (USIBC) president Ron Somers emphasised on taking steps to restore investors' confidence. "Bold leadership that continues to open India's economy and which advances reforms will help staunch the rupees' slide," Somers told PTI.

Lifting FDI caps in Insurance should be the highest priority, while resisting protectionist measures - such as forced manufacturing and backsliding on Intellectual Property protection - is crucial.

Demonstrating such leadership will go a long way towards restoring investor sentiment," Somers said.

Refraining to comment on the Food Security Bill, Somers said rather than discussing the merits or timing, it is now essential to welcome organised retail into the country such that MNCs may help achieve the Bill's efficient implementation and very purpose - to facilitate inclusive growth.

On the Land Acquisition Bill, he said, certainly, the existing law dating back to 1894 requires modernisation. "However, my hope is that the outcome does not discourage investment in the essential sector of infrastructure. Both investment and infrastructure are the need of the hour,"Somers said.

Meanwhile writing for The New York Times, Simon Johnson,former IMF chief economist, said the rupee is able to
depreciate without too much drama, and this by itself should,over time, help to reduce imports and increase exports.
Weakening confidence in the Indian economy has beencompounded by some policy confusion in recent months, which
has further encouraged domestic residents to move funds out ofthe country, Johnson said.

The former IMF economist said there is political pressureto keep the economy growing ahead of elections in early 2014.
"So we should not expect fiscal policy to tighten. And ifthe Federal Reserve does indeed tighten monetary policy in the
United States currently referred to as "tapering" itspurchase of bonds that will tend to push up interest ratesand is likely to attract more capital out of emergingmarkets," he said.

Johnson said when a country like India faces crisis, fordomestic reasons but also perhaps because of what is happening
in the United States, capital tends to flow out of thatcountry and toward safe havens (like the United States).
According to The Wall Street Journal, the rupee's steepdecline is fuelling inflation and posing a threat to public
finances as the cost of oil, fertiliser and other criticalimports in rupee terms rises.

Companies with foreign-currency debts also face mountingrepayment costs.

A poll of 18 economists conducted in recent days by TheWall Street Journal found a median gross domestic product
growth estimate of 4.6 per cent for the April-June quarter.Forecasts ranged from 4 per cent to 4.9 per cent.
"Everything depends on whether the rupee stays at theselevels or it bounces back," D K Joshi, chief economist at
ratings and research firm Crisil, told the daily.

"If it stays at these levels, it will lead to a lot oftrouble from many directions," he said.


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