Trying to calm India’s financial storm
As the financial markets in India seem to be hit by a storm, the finance minister of the country is trying to calm the situation. India has encountered a major challenge during the last few weeks, and is trying to recover. The rupee has fallen to a historic low and equity markets have fallen by as much as 11 percent as investors quickly pull their money out of the country.
Finance Minister P. Chidambaram tried to restore confidence during a press conference on Friday, even as he acknowledged the country was facing a challenging time.
“We believe the rupee is undervalued and has overshot what is generally believed to be a reasonable and appropriate level,” he said in a written statement. “Capital inflows will, in due course, correct the position.”
The trouble in India is the result of an emerging markets sell-off, which has been triggered by the talk of tighter U.S. monetary policy. Local factors, however, have influenced the slide. India has a large current account deficit that reflects the country’s tendency to import more than it exports, showing it relies on foreign capital.
The finance minister has vowed to shrink the country’s account deficit this fiscal year, to bring it down from $88 billion in 2012-2013 to $70 billion in the current year. In addition, he assured investors “there was — and is — no intention to introduce any type of capital control,” which could result in further damage to foreign investments.
Regardless of the vows to stabilize the economy and allow the free flow of capital, investors and economists appear to remain unconvinced. Chidambaram’s words do appear to contrast the government’s move, which has been considered controversial, to restrict the amount of money Indian citizens are permitted to take out of the country. There are similar restraints regarding how Indian companies can invest abroad that have caused concern regarding how foreigners may be subjected to restrictions on their cash.
In the year to March 31, India’s economy grew by 5 percent. That was the slowest pace for the country in more than a decade. It has failed to pick up pace in the first quarter of the current fiscal year. The finance minister said he is considering additional economic reform, and he has made the forecast that financial growth will accelerate during the next few quarters.
He said, “Therefore, there is no cause for the panic that seems to have gripped the currency markets and that is feeding into other markets.” Some believe the finance minister’s reassurances that growth will improve may be optimistic. Corruption and bureaucracy are said to be negatively impacting the progress.
The rupee hit a record low versing the dollar on Thursday, falling by about 20 percent in less than a year’s time. On Friday, it recovered slightly and the Mumbai Sensex, the country’s benchmark index, bounced back at the end of the week after experiencing major drops.