The timing of US Federal Reserve chairman Ben Bernanke’s remarks on unwinding the stimulus package couldn’t have come at a more inopportune time so far as the Indian economy is concerned. Expectedly, the rupee has crashed to a new low, touching 60 and still counting.
Ever since the world recovered from the dotcom bust and found a new mantra — emerging markets — foreign investment, both direct and financial, has been chasing an India Story that delivers returns in high double digits a year.
Blame it on the third round of quantitative easing by the US central bank (QE3). Or rather it’s winding down. It involves a humongous purchase of bonds by the Fed to pump in loads of cheap money into the financial system to help the American economy claw out of its worst fall since the Great Depression.
With the US showing early signs of a turnaround, and the Fed signalling a calendar of rolling back this stimulus package, capital flow to countries such as India could turn out to be among the first casualties.
Investors poured $88 billion (about Rs.484,000 crore) into our stock exchanges last year. The tide has since turned.
Financial investors have begun selling Indian stock since the beginning of May and with the curtains likely to come down on the US stimulus package, expect more billions to move out. Foreign direct investment (FDI), at a not-so-impressive $22 billion last fiscal, drives on a slower lane where sudden U-turns are difficult.
As equities, currencies and commodity markets crumbled, central banks, currency administrators and macro-economic managers across the world were seen swinging into action trying to tame a fast-spreading global flu.
For finance minister P Chidambaram and RBI governor D Subbarao, a persistently weak rupee adds to an array of problems. There is precious little any government can do to keep hot money from flowing out, but it can very well open the doors wider for dollars to flow in.
Given its relative stability, FDI is always more welcome than portfolio investment, yet restrictions remain across a wide swath of the economy.
A medium-term solution would require political urgency to dismantle the steeple chase that is our FDI policy today.
Fresh and urgent policy pronouncements will, at the very least, help soothe the frayed nerves of investors who fear that the government is more likely to be focused on political risk management rather than reverse the slowdown in the economy.