Sizeable portfolio capital outflows and large external financing requirements triggered downward pressures on the rupee from late May before stepped-up policy actions and some calming in investor sentiment provided support. The central bank took a series of steps from mid-July by limiting banks' access to its Liquidity Adjustment Facility (LAF), hiking the interest rate on borrowing from other discount windows and draining liquidity. Financing for gold imports was curtailed, and gold import tariffs hiked. In mid-August, the amount domestic private sector firms can invest overseas was cut from 400% to 100% of their net worth. Restrictions were tightened on residents sending money and purchasing property abroad. The government also took measures in August and September to attract capital inflows and lift the legislative paralysis. The subsequent rebound of the rupee along with financial calm at home and abroad allowed the central bank to begin scaling back exceptional monetary measures from late September, while continuing to signal inflation concerns. The favorable monsoon and strong exports are giving a lift to the economy, but lingering imbalances and structural impediments suggest a slow recovery.
- Real GDP growth revived from a recent low of 4.4% in the second quarter to 4.8% in the third quarter.
- After declining to a 43-month low of 4.7% in May from a recent high of 8.1% in September of last year, the 12-month increase in wholesale prices rose to 7% in October with rising food and fuel prices as well as imported inflation.
- The current account deficit narrowed from $22 billion in the second quarter to $5.2 billion in the third quarter as exports surged and imports slipped.
- The rupee fell from Rs53-55/$1 in the first five months of 2013 to a record low of Rs68.8/$1 in late August, before rebounding to around Rs62.3/$1 in early December.
- While the policy rate was raised by 25 basis points to 7.75% in late October, the Marginal Standing Facility rate was progressively lowered from a recent high of 10.25% in July to 8.75% in late October, bringing the differential with the repo rate to 100 basis points to normalize monetary policy.
- The government is continuing administered domestic fuel price hikes to meet its deficit-reduction target, despite expanding the food security program for the poor. The budget deficit excluding asset sales fell from 5.8% of GDP in 2011/12 to 5% in 2012/13, and may be around that level in 2013/14.
IIF Teleconference: India's Economic Policies and Near-Term Outlook
November 25, 2013 — In this members-only teleconference, Dr. Bejoy Das Gupta, IIF Deputy Director of the Asia/Pacific Department, shares insights gained during his meetings with officials and the private sector in India.
September 25, 2013
The sell-off in emerging markets since May exposed the large underlying imbalances in the Indian economy. The sudden withdrawal of external financing triggered a plunge in the rupee and jeopardized hopes for stronger growth. A series of corrective policy measures, including a tightening in domestic liquidity and a steep hike in short-term interest rates, as well as renewed progress with reforms, have since bolstered market confidence. The recovery of the rupee is allowing the central bank to scale back the exceptional monetary measures, while continuing to signal inflation concerns.Read More
July 24, 2013
After taking steps to drain liquidity in mid-July, the central bank followed up with additional tightening measures demonstrating the heightened policy focus on bolstering the exchange rate.Read More
July 21, 2013
The government sought to attract large capital flows to provide time for the twin deficits to adjust at a gradual pace, but the strategy came unstuck with the sudden sell-off in emerging market assets while structural reforms were slow in coming. The recent liquidity-tightening measures by the central bank in response to market pressures should stabilize the rupee, although at a cost of delaying the recovery in economic activity.Read More
May 29, 2013
Investor-friendly measures and greater global appetite have precipitated a surge in foreign purchases of domestic stocks and bonds. The economy will benefit over the near term, although greater foreign involvement and incomplete adjustment raises the risk of financial market volatility.Read More
April 26, 2013
Subdued domestic demand, falling commodity prices and improving agricultural supply are contributing to a decline in the high inflation rate. The central bank is likely to take the opportunity of lower inflation, fiscal restraint and the efforts to alleviate supply constraints to persevere with gradual monetary easing.Read More
April 05, 2013
The government’s renewed commitment to containing the large fiscal imbalance is underscored by stepped-up spending restraint since September, although the new budget is cast with a view to the national elections in mid-2014.Read More
January 28, 2013
A revival of reforms curbing subsidies, reinstating fiscal adjustment and attracting investment is lifting the economy, bolstering financial markets and supporting the balance of payments. Lower inflation and the stepped-up reforms will allow the central bank to make moderate policy rate cuts over the near term. Nevertheless, macroeconomic imbalances remain and the climb ahead will be slow.Read More