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10 Sep 2013

International Economy

[AEC Plus] Falling Rupee Underscores Fragility in Indian Economy; RBI Policy to be Monitored (Current Issue No. 2400 Full ed.)

The current economic situation in India reflects overall emerging market performance right now. The country is facing a challenging situation – capital outflows sparked by concern toward looming US Fed tapering of their QE program, expected in September. As a consequence, the Indian Rupee (INR) seems in disarray, hitting record low of INR68.845/USD on August 28, 2013, before gaining ground to INR66.02 on September 5, 2013 in response to the appointment of Dr. Raghuram Rajan as the new governor of the Reserve Bank of India (RBI).
It will now be crucial to closely monitor how the RBI – under Dr. Rajan's watch – will save India from their current economic predicament. It remains to be seen whether the new RBI head will maintain previous stimulus policies, or shift toward keeping the Rupee steady. On this matter, KResearch holds the view that the Rupee volatility will need Indian central bank's full attention with as quick a fix as possible before investor confidence is further destroyed by the embattled currency, as well as their ailing economy. Over a longer term, there are larger problems facing India in their current account and fiscal deficits that must be sorted out to ensure durable economic stability. On September 20, 2013, RBI's new governor plans to unveil new monetary policies in his first policy address after assuming the role.
Indian manufacturing productions that rely heavily on imported materials, e.g., autos and energy, are at risk of being hard-hit by depreciation of the Rupee. Other sectors – real estate, construction, consumer product manufacturing – will probably slow somewhat, though not so much because of the falling Rupee, but because of inflationary pressure and higher business costs.

As the Rupee falls, Thai exports to India may sustain some weakness. This is because 90 percent of our exports to India are industrial products, mostly raw materials or intermediate components, e.g., plastic resin, chemical products, steel and products, gems and jewelry, internal combustion engines, automobiles and parts, etc. Given a downward trend in their industrial activity, our exports to India are beginning to feel the impact from slow performances, too. Thus, we at KResearch forecast that Thai exports to India may contract perhaps at least (-)1.5 percent in 2013 but a (-)4.0 percent drop can be expected as a worst-case. A value may total around USD5.25-5.35 billion.

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International Economy