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Economists say Govt Steps will Lift Sentiment

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Economists feel the government measure to address the current account deficit and rupee depreciation may improve sentiment and were just the limited response that was needed, but some felt they suggest panic on the part of the government. The government on Friday announced a slew of measures to bring additional capital inflows of $8-10 billion to arrest rupee depreciation and address the underlying problem of high current account deficit. “We view the government’s guarded response as appropriate because India’s macro fundamentals are in a much better shape today than in 2013 – higher growth, stable inflation and fiscal commitment - and do not necessitate a knee-jerk reaction,” Sonal Varma of Nomura said in a research note.
Upasna Bhardwaj, senior economist at Kotak Mahindra Bank, was not sure how much capital flow will come from these measures but agreed that no panic reaction was needed. “Though we need to be vigilant of rupee depreciation, there is no need to press the panic button and announce any Big Bang measures because our fundamentals are stronger compared with others,” Bhardwaj added.
India’s former chief statistician Pronab Sen had a different view. “I am puzzled by these measures since they seem to be sending out wrong signals,” Sen said. “First, they give the impression that the government is panicking, which will worry investors and encourage speculators because it is rightly assumed that the government knows much more than the average investor/speculator.” “They will assume that government is worried about something if they want to raise $8-10 billion despite RBI holding $400 billion of forex reserves,” he added.
Permitting manufacturing sector entities to avail ECB up to $50 million with a minimum maturity of one year from the earlier period of three years is another measure economists have issue with. “Though these measures don’t seem to have a longterm impact, the government has tried to incentivise debt creating capital inflows and this does not augur well for the economy in the medium- to long-run,” said Devendra Pant, chief economist at India Ratings. As per Sen, by easing tenor of ECBs to one year from three years, the government has made external borrowings attractive for short-term capital needs, of which there is no dearth in Indian banking sector.

The Economic Time, 17th September 2018

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