The Bombay Sensex might have breached the 20,000 mark two days running on October 29 and 30 and even in early November and then closed well below that point or even receded further to under 19,000. But the flip flop and bounce remains in place. The rupee value has stayed well below the 40-rupee point to the US dollar, but neared 39.40 rather than 39.20 as the Reserve Bank and the Government have orchestrated measures to check the liberal flow of bank credit to industry and commerce even in the festival Diwali season to keep inflation in check.
In spite of all the efforts of the financial authorities to stop the flood of dollars into the Indian market and check the rupee value rising fast, will it be possible to stop the rupee from going up against world currencies for too long? Perhaps, not, not for too long.
The bouncing stock markets and the overall attractiveness of India as a business and investment destination can no longer be overlooked by anyone in the world in spite of the American slowdown. In fact, the cut in American interest is making India even more attractive for much bigger returns. The US returns range from 2 to 4 per cent from banks and from Wall Street it may be 5 to 10 per cent, but India offers quick bucks-up to 25 and 30 per cent. The curbs on P Notes from Mauritius which was unregulated may cut dollar flows a little, but the overall foreign institutional investment is so small that it is unlikely to be hit much. Investment. If Indian stock markets were expecting $30 billion in the current calendar year, it might be just $25 billion. But the Government and the RBI are very pleased that they have succeeded in their tough stance and they could take some more to regulate the markets.
The Government and the Reserve Bank are certain that orchestrated measures by even the Security and Exchange Board of India or Sebi and other financial authorities are certain that new constraints will not slow down the economy and the projected 8 to 9 per cent annual growth will continue; only it will not jump to 10 or 11 per cent, though manufacturing may reach those levels. India has already unveiled through Tatas the world's fourth fastest supercomputer with more than a trillion functions per second. India is going great guns in several areas, be it space, knowledge economy, advanced defence structures.
You name it and India may well have it.
The world now looks at India as a very attractive destination for investment where good profits and good returns appear to be certain. This is quite the reverse of the situation even two or three years ago. If there were any doubts about the performance of the Indian economy, they have all disappeared. Instead of preaching to India to adopt this policy or that, the world is eager to learn from India how to manage business, industry, trade and commerce. How to put in place checks and balances for a well moderated growth in the short term and long term-that is what the policy makers and leaders of economies in the private sector are studying closely.
Now that the Indian winter has started-and for many countries, it is the equivalent of their spring-heads of government and corporate entities are catching flights or coming by official or private jets to a very interesting destination: Delhi, Mumbai, Bangalore, Hyderabad, Chennai, Kolkatta and several other State capitals and industrial centers. If heads of government and corporations cannot arrange visits to India at short notice, their Ministers and other financial and business wizards are coming in, not just for a casual look or dekko (or dekho in Hindi), but serious discussions on collaborations, new projects and serious inquiries from their counterparts and regional leaders.
The visitors of many hues may go to the Taj, or even to Goa and God's Own Country that is Kerala's backwaters are or Sunderbans near Kolkatta, but that is just the incidental part of the serious junket. Tourism in India sure has great potential and travel agents from around the world are coming in droves to cash in on new exotic destinations. Airlines are looking at the prospects of new Indian visiting arenas for work and play.
In the background of all this, the Government and the Reserve Bank have been truly concerned over the rupee value hovering just above the 39 rupee mark to the US dollar, although some measures have pushed it up from the 39.20 to 39.40 and even 39.70 to the dollar in recent weeks. Thus the public sector and private sector banks cash reserve ratio has been increased by half a percent so that credit is not readily available to trade and industry and the housing sector or for car loans and inflationary pressures can be kept in check.
The Reserve Bank was widely expected to cut the prime lending rate from 6 per cent to 5.5 per cent, but this has not been done so that banks will not be able to reduce their interest rates for the present, except on their own. This is not being called a tight money supply policy, but just a matter of prudential banking practices.
Yet the Indian policy makers are aware that after the American sanctions on Iran and other difficulties of energy supply to the world- the result is that crude oil is well above $92 or 93 a barrel and racing to $100 a barrel. It had touched $98 earlier this month, though the oil producers like to think that the drop in dollar value around the world has neutralized the price, which is both fact and fiction. The moderated Indian cost of crude is $88 per barrel, but oil companies are losing money in a big way, but though making a lot on derivates like engine oil. Yet nobody talks of those huge profits as the output of those is not too high. The high energy costs will hurt users and buyers of cars in the US and Europe as well as elsewhere in the world, though in India the Government will not allow an increase in the prices of petrol, diesel, gas or kerosene for almost six months to come for reasons of elections in a couple of States. In the US, gasoline will touch $4 a gallon, up from $3 until September. Heating costs will rise too in the winter that has begun and temperatures have dipped below freezing in many countries.
After the housing subprime debt defaults in the US, the housing market there has shrunk from 6.25 million housing units a year to less than half. In fact, new units being built are as few as 1.4 million a year, a slowdown is clearly on the cards and will take longer than expected to correct. But the Indian authorities believe that India is well insulated from American or European slowdown factors because the internal market is huge.
As such, how long can the India rupee value be kept in check and stopped from rising? Not for too long. Perhaps, it will keep rising at the average of fifty paise to one rupee against the dollar in the years to come and by the year 2020, it may well be 25 rupees to the dollar with similar adjustments against other world currencies, give and take a few rupees here and there, depending on the strength of the Euro, the British pound or the Japanese yen.
The Chinese currency is also expected to be upvalued gradually in the years to come so that Chinese do not have an excessive exchange rate advantage in the rest of the world.
Lalit Sethi, NPA
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