India’s prime minister Manmohan Singh, in a rare bullish speech to his country’s parliament on Friday, offered an explanation for the rapid fall of the rupee over the past week but said he was optimistic that the current instability would strengthen India’s economy in the future.
Singh blamed global unrest and a huge current account deficit for the fall of the Indian rupee, which has depreciated sharply against the dollar since the last week of May and fallen by around 20 percent since the beginning of the year. The 80-year-old economist restated his government’s commitment to reforms.
“We are no doubt faced with important challenges, but we have the capacity to address them,” Singh said. “It is at times like these that the nation shows what it is truly capable of.”
Singh placed the fall of the rupee on global unrest and the fear that U.S. Federal Reserve is on the verge of ending its easy money policy. This turbulence has not only pulled down the value of the rupee but also other global currencies like the Brazilian Real and the Turkish Lira.
“Clearly we need to reduce our appetite for gold, economize in the use of petroleum products and take steps to increase our exports,” said Singh. The former economist who is credited with helping India emerge from a major deficit in 1991.
Singh ruled out capital controls to stabilize the rupee despite widespread fear among analysts. Over the last two decades India has grown as an open economy, and Singh said, “there is no question of reversing these policies just because there is some turbulence in capital and currency markets.”
Singh called out for a reduction in India’s hunger for gold and oil imports. He said that while exports have failed to grow, inflation too, has been much higher making a correction in the exchange rate inevitable.
“To some extent, depreciation can be good for the economy,” Singh said, adding that many sectors have regained competitiveness in export markets as a result of the fall in the exchange rate.
The government is committed to keep the current account deficit to 2.5 percent of the gross domestic product, Singh said. He predicted that India will grow substantially in the second half of the fiscal year owing to the effects of a good monsoon, revival of stalled projects, liberalization of foreign direct investment and fuel subsidy reform. Still Singh warned of a temporary spike in inflation in coming months.
Ending his speech on a note of optimism, Singh said that India’s overall public-debt to GDP ratio has been in decline.
“All in all, the macro-stabilization process which should support the value of the rupee is under way,” Singh said. “Even while we go about doing what is necessary, it is important to recognize that the fundamentals of the Indian economy continue to be strong.”