I am always confused whether its good to have a provocative or sensational title for an article. What if the content is miserable and fails to keep excitement of the title going??
On the other hand, an eye-catching title gives you a better chance of exciting the viewer enough to, at least, read it once. You may call it the "Times Of India" strategy. After that, the content takes over and I have a chance to prove that the article and its title, both, were justified.
In short, its a double edged sword.
I do not know if the title excites you enough but if you are reading this line, its purpose has been served. So I quickly move on to the topic itself.
I have written before on INR at various points. In this article, I will try to put my point with the help of a few indicative charts.
At the very first lets take a look at the historical Current Account Balances.
As can be seen, trend-line Current Account Deficit (CAD) has zoomed in the last 3-4 years. This is the result of "consumption" boom, without a parallel manufacturing/production/mining (whatever it is called as) growth.
Now lets look at the historical chart correlating the USD-INR with the CAD.
Souce : Bloomberg
(White line - CAD, Orange line - USD-INR)
Persistent CADs ensured that INR kept depreciating through 80s and 90s. This included the 1991 currency crisis, where RBI and Central Govt were left with no option but to devalue the INR substantially.
But then came the first decade of the 21st century where the trend-line CADs were under control. INR actually went through a period of appreciation against the USD starting from 2000 to early 2008, thanks to the burgeoning foreign exchange reserves. These reserves were a big function of FII/FDI inflows and some external foreign currency borrowing as well. Have a look at the chart below.
Souce : Bloomberg
(White line - CAD, Orange line - USD-INR, Yellow Line - Forex Reserves)
Then came along the global crisis in 2008. FII inflows dried up and crude oil also shot through the 100$ mark. INR suffered. It went all the way from 40 to 52 in no time.
Since March 2009, with the world flush in fresh liquidity, FIIs came back, crude oil was at reasonable levels and Indian government threw all fiscal caution to the winds inducing a domestic consumption boom.
Over and above the FII/FDI inflow, foreign currency debt was also coming in.
But this time, forex reserves did not oblige (at least not till now) and remained essentially flat.
In fact, after having reached a peak of about 320 bn USD, reserves have gone down to closer to 290 bn USD. All this has been a function of the sustained CADs that the consumption boom has induced.
Lets have a look at the final chart:
Souce : Bloomberg
(White line - Forex REserves, Orange line - USD-INR, Yellow Line - External Debt)
Early 2008, external debt was a good 100bn USD below the forex reserves. Now the external debt is above the forex reserves.
We are still running reasonably big CADs. Our savings rate has been going down. Our dependence on foreign inflows has magnified in the last few years. Its almost like living on the edge, or at least very close to it!!
The slightest hint of a crisis globally and INR suffers. We got a glimpse of that in late 2011, when INR went from 44 to 53 before anybody could blink.
RBI used all its levers to pull it back. But that came at the cost of domestic liquidity. And that also means that there are not many arrows left in RBI's quiver.
There are the usual saviours/hopes:
- Crude oil crashes to 90$ or below.
- FII/FDI keeps pouring in to fill the gap left behind by the trade deficits.
- Gold imports collapse.
- Governance improves dramatically.
As things stand now, the next time a crisis comes, INR may not stop at 54!!!
As I suggested earlier in the article, I am playing with a double-edged sword. I hope not to get my head chopped!!
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