India rupee hits new low, World Bank says gloom overdone
MUMBAI — India's currency plunged to a new low and shares tumbled on Monday even as the World Bank's chief economist said the country's problems were "overplayed".
Kaushik Basu said India was not in danger of a full-blown economic crisis, despite mounting fears about Asia's third largest economy, which is struggling with a gaping current account deficit that has helped push the rupee to record lows.
"Growth may not have bottomed out. We have further to go (down), but the situation is not as bad as is being captured by the mood and captured in the headlines," Basu said in New Delhi.
Basu, who was a top adviser in the Indian finance ministry until last September, said the situation was sharply different from 1991 when India had to seek a bailout from the International Monetary Fund in what was considered a national humiliation.
"India is nowhere near the 1991 crisis. The gloom is being overplayed," he told a business audience.
"In 1991 we had foreign exchange reserves ultimately for 13 days of imports, we now have enough for seven months."
"There is no comparison. I don't think we are anywhere near that situation. We are a much stronger economy than in 1991."
The partially convertible rupee, Asia's worst-performing major currency this year, fell to 63 to the dollar in trade Monday, past its previous low of 62.03 on August 16, on concerns about the slowing economy.
Shares, which fell nearly four percent on Friday, plunged over two percent before retracing some losses to close down 1.56 percent at 18,307 points.
Nervousness rose over the currency as foreign investors pulled out cash.
Bond yields hit a five-year peak of 9.17 percent, reflecting falling investor appetite for Indian debt as worries about the economy and potential default mount.
Basu said India's economy -- even with 4.8 percent annualized growth in the quarter to March -- was among the world's fastest-growing.
He urged people not to fall into a "spiral of pessimism".
In the long run the crux of India's problems lie with issues such as "governance, bureaucratic efficiency, the business ethos", Basu said.
"The countries that have done well historically... they have managed to clean up their business ethos" so nobody has to pay bribes to get tasks done, he said.
Government also weighs in as a "helpful partner instead of as an obstructionist force -- that is the fundamental thing we need to work on".
Corruption has long been a central issue in India and the Congress-led government has been racked by a string of graft scandals.
Basu urged the central bank to use its reserves to curb turbulence in the rupee. But he said India should "not try to buck the trend of the exchange rate".
"If you deny the laws of the market, you will come to grief," he said.
At Monday's new low the rupee has fallen over 14 percent against the dollar this year, outstripping the yen in its tumble.
Last Wednesday, in the latest of a series of measures to prop up the currency, the central bank spooked investors when it tightened controls on the amount of money Indian firms and individuals can send abroad.
The move has been criticized as a disturbing throwback to the days before the country unleashed its economic liberalization drive in the early 1990s, when Indians' access to foreign exchange was strictly limited.
In the past few weeks policymakers have raised short-term interest rates, announced plans to let state firms raise foreign funds abroad, and curbed gold imports in a bid to narrow the deficit and stabilize the rupee.
Emerging-market currencies have been hit by expectations the United States will roll back massive stimulus measures responsible for huge inflows of foreign investment into developing countries.
India relies on foreign capital to fund its record current account deficit. But since June 1, overseas funds have pulled out $11.58 billion from India's stock and debt markets.
Basu said it might be good for the central bank to "go a bit easy on liquidity for the next nine months", saying India may need a dose of economic stimulus.
"It could create the demand (in the economy) and burst that bubble of pessimism," he said. — AFP
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