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India expected to be preferred pick among EMs despite rupee slide

September 14
19:09 2018

Mohit Ralhan

TIW Private Equity

The Indian rupee has hit a new low and the unabated slide has scared market participants and policymakers alike. But this is not the first time though. Something similar had occurred in 2013 as well when the Indian rupee had fallen from around 54/$ in April 2013 to 68/$ in August 2013.

In 2013, the financial markets had got spooked by the “tapering” announcement of US Fed. The price of Indian basket of crude oil was extremely high at above $ 100 per barrel. In addition, the growth was sluggish, and the inflation was also high at above 9 percent.

Fast forward to 2018 and the hawkish monetary policy stance by the US Fed is still the major reason leading to capital flight, especially from the Indian bond market. FPIs have pulled out about Rs 48,000 crore from India in the first half of 2018 and about 85 percent of that was pulled out from debt markets. This is the largest outflow in the last 10 years.

The increase in the price of crude oil is also a major contributor just like in 2013. There is also inherent strength in the US dollar due to tightening liquidity in the emerging markets. The global trade tensions are new developments, which have added a dimension of uncertainty in financial markets.

Other emerging economies have been hurt as well with Turkey and Argentina being noticeable examples. But India is still far away from being bracketed as “fragile”.

India’s GDP growth is robust at above 7 percent. There is no fear of policy paralysis and the reforms have gathered pace with implementation of GST, further opening to foreign direct investment (FDI), shift to direct benefit transfers, Insolvency and Bankruptcy Code and improvement in ease of doing business to name a few.

In addition, the inflation is under 5 percent. India also has large forex reserve at around $ 400 billion in comparison to August 2013, when it was $ 277 billion. It gives RBI more firepower to intervene in forex markets.

Importantly, India’s twin deficits are in much better shape. India’s current account deficit (CAD) stood at 2.4 percent of GDP for Q1FY19; this number was 4.8 percent of GDP in Q1FY14. The fiscal deficit in 2013 was 4.9 percent of GDP and currently it is at 3.5 percent of GDP and expected to decline further.

Indian economy today is much stronger, and it is expected to remain a preferred investment destination among the emerging markets.

The flight of capital from Indian financial system is also enhanced due to the political uncertainty in the election year. Once the general elections in 2019 are over and a stable government is in place till 2024, the depreciation in INR against USD should come back to its structural and gradual rate.

Disclaimer: The author is Managing Partner & CIO at TIW Private Equity. The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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