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News Analysis: Amid Economic Stress, Differing Strategies Emerge

September 20, 2013 by

In an interview here, the vice president of Indonesia characterized higher interest rates and a weakened currency as the “new normal.” Boediono, the country’s vice president, who uses only one name, said that Indonesia would face a tougher international financial environment in the coming months and should give greater emphasis to a stable currency, stable prices and a stable trade balance and not just pursue economic growth.

“We have been addicted, so to speak, with an easy-money environment for four years,” said Mr. Boediono, the main architect of Indonesian economic policy since the Asian financial crisis in 1997 and 1998. “We know that we have to make some adjustments, and maybe by next year, we have to really, fully adjust to a new normal, so to speak, where easy money is no longer” available.

But in Mumbai, the new governor of the Reserve Bank of India suggested that India faced less of an international threat after the Federal Reserve decided on Wednesday to continue its economic stimulus, at least temporarily. The governor, Raghuram Rajan, lowered a key interest rate on Friday by three-quarters of a percent, although he raised another less important rate by a quarter of a percent.

India pushed interest rates up sharply over the summer to make financial investments there more attractive and slow the fall of the rupee. Reversing part of that increase now “will provide a boost to growth, reduce the financing distortions that are emerging in the market, and reduce the strain on corporate and bank balance sheets,” Raghuram Rajan, the new governor, said Friday at his first news conference on monetary policy.

In monetary terms, India is zigging while Indonesia is zagging, despite the many common challenges that have pummeled their currencies and stock markets in recent weeks. Both must balance a need to preserve economic growth for large, heavily poor populations, while at the same time preventing a buildup of inflation that might discourage longer-term investments — a tricky balancing act that has bedeviled policy makers in the United States and other affluent countries over the years.

India, with a population of about 1.2 billion, and Indonesia, population 250 million, are both struggling to modernize their infrastructure while stuck with complex land ownership laws that make it hard to redevelop cities rapidly. Both are wrestling with costly but politically popular fuel subsidies that are driving up government budget deficits, and both have indignant publics demanding an end to endemic corruption.

Economically, both have sizable current-account deficits compared to their economic output, together with nearly double-digit inflation in consumer prices.

Perhaps most important, both face national elections next year that limit their ability to make politically unappetizing economic decisions: India will elect a new Parliament by the end of May, while Indonesia will elect a new legislature in April and a new president in July.

The different policies outlined on Friday in Jakarta and Mumbai reflect differences in the seriousness of their predicaments, however, with India appearing to be in considerably worse shape.

While Indonesia’s ports and highways still have shortcomings, as does the country’s bureaucracy, they are good enough that the country has emerged as one destination for the many companies shifting operations away from China in response to surging blue-collar wages there. India’s bureaucracy remains stifling, and the potholes and traffic on the country’s roads are so bad that vehicles scarcely move faster than walking speed in some areas; in other areas, sometime gruesome crashes are a regular occurrence.

Neha Thirani Bagri contributed reporting from Mumbai.

Article source: http://www.nytimes.com/2013/09/21/business/global/indonesia-needs-to-wean-itself-from-easy-money-leader-says.html?partner=rss&emc=rss

Filed Under: Economy News Tagged With: , ,

Indian Rupee Falls to Record Low

August 6, 2013 by

HONG KONG — The Indian rupee lurched to a record low against the dollar on Tuesday, shrugging off recent measures aimed at propping it up and underscoring the severe problems facing the economy as the country heads toward an election next year.

The rupee has slumped nearly 15 percent since May, when the possibility of scaled-back bond purchases in the United States prompted foreign cash to flee emerging markets around the world. The Indian central bank reacted last month with several steps to support the currency, but the rupee continued its slide Tuesday, falling to 61.71 per U.S. dollar by late afternoon.

Stemming the rupee’s rapid decline will be one of the first tasks for the next governor of the Reserve Bank of India, the nation’s central bank. Reuters reported Tuesday that the Indian government appointed Raghuram Rajan, the chief economic adviser in the finance ministry, to the post. According to a statement by the finance minister, Mr. Rajan will replace Duvvuri Subbarao, whose tenure ends on Sept. 4 after five years, Reuters reported.

Mr. Rajan joined the Indian government last August, after serving chief economist at the International Monetary Fund and a professor at the University of Chicago.

India’s fundamental problems, said Rajiv Biswas, Asia-Pacific chief economist at IHS Global Insight in Singapore, are a “chronic current account deficit,” which has worsened over the years, and a big outflow of foreign capital since Ben S. Bernanke, the chairman of the United States Federal Reserve, signaled in May that the American economy may soon be ready to be weaned off the massive bond purchases that have bolstered its economy since the global financial crisis.

“Last year, they were able to deal with the current account deficit because capital inflows were strong,” Mr. Biswas said. Now that the money is ebbing away, the rupee is coming under systemic pressure, he said.

More broadly, much-needed economic overhauls — like improving the country’s infrastructure and cutting red tape — have been notoriously tough to push through, while a slowdown in growth in recent years has made the country less attractive to foreign investors, despite the potential offered by a huge, young population.

The pace of expansion has slowed to about 5.5 percent this year from more than 8 percent in 2009 and 2010, and the latest purchasing managers indexes for the manufacturing and services sectors, released by the British bank HSBC, both slipped in July.

“There are few good signs on the economic horizon,” Mr. Biswas said, “and there is not a great deal that either the government or the central bank can do in the short term.” He added that slowing growth had further reduced the government’s room to maneuver.

The slide in the rupee, moreover, will probably make things worse, analysts warned.

Although a cheaper rupee makes Indian exports less expensive for consumers abroad, the effect provides relatively little lift to the Indian economy, as the country is far less reliant on exports than many of its Asian peers.

Meanwhile, the weaker currency raises India’s import bills for dollar-denominated goods like oil, of which the country is a big importer, adding pain to an already slowing economy and potentially fueling inflation to worrisome levels further down the line.

Article source: http://www.nytimes.com/2013/08/07/business/global/indian-rupee-falls-to-record-low.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

India Trims Interest Rate as It Battles a Slowdown

May 3, 2013 by Leave a Comment

MUMBAI — The Indian central bank cut its benchmark interest rate Friday for the third time since January as growth slowed and inflation ebbed, but it disappointed markets by saying that there was little room to ease monetary policy further.

The central bank, the Reserve Bank of India, trimmed its key policy repurchase rate — the rate at which banks can borrow from the central bank — by a quarter of a percentage point to 7.25 percent, the lowest level since May 2011. The central bank kept the cash reserve ratio for banks unchanged at 4 percent. Both moves were in line with economists’ expectations.

The central bank warned, however, that the risk of inflationary pressure persisted despite a recent sharp decline in wholesale price index inflation and that a high current account deficit posed the biggest risk “by far” to the Indian economy.

“The balance of risks stemming from the Reserve Bank’s assessment of the growth-inflation dynamic yields little space for further monetary easing,” the bank wrote in its policy statement.

Some in the market had been hoping for more aggressive policy easing actions and a less hawkish tone from the central bank’s governor, Duvvuri Subbarao, as India grappled with economic growth that slowed to about 5 percent in the financial year that ended in March, its weakest performance in a decade.

Indian stocks and the rupee fell after the policy statement, and bond yields rose.

“In essence, the guidance from the central bank is that the correction in the inflation and current account position is more cyclical, rather than structural,” said Radhika Rao, an economist at DBS in Singapore.

“Some sacrifice by way of slower growth seems inevitable then,” Ms. Rao said.

In March, India’s benchmark inflation — the wholesale index — fell to its lowest level in more than three years at 5.96 percent, but the consumer price index remained elevated at 10.39 percent.

The current account deficit swelled to a record 6.7 percent of gross domestic product in the October-to-December quarter. While that is expected to ease on lower global commodity prices and a rise in Indian exports, the deficit is on track to remain well above the 2.5 percent level that is seen as sustainable.

“Should global liquidity conditions rapidly tighten, India could potentially face a problem of sudden stop and reversal of capital flows jeopardizing our macrofinancial stability,” the central bank said.

The Reserve Bank of India said it expected the economy to grow at a pace of 5.7 percent in the year that began in April, and projected wholesale price inflation at about 5.5 percent during the year. It said its intention was to lower wholesale inflation to 5 percent by March 2014 “using all instruments at its command.”

Article source: http://www.nytimes.com/2013/05/04/business/global/04iht-rupee04.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

Indian Central Bank Cuts Rates

March 19, 2013 by Leave a Comment

MUMBAI — The Indian central bank lowered its benchmark policy rates by 0.25 percentage point Tuesday for the second time this year in an effort to help revive economic growth.

The rate cut was overshadowed by a political crisis when a major ally in the governing coalition quit, raising fresh doubts about Prime Minister Manmohan Singh’s ability to push through changes and regain investors’ confidence.

In its midquarter policy review, the Reserve Bank of India lowered its benchmark rate to 7.5 percent, as expected, and reduced another important number, the reverse repo rate — the rate at which it borrows from banks — to 6.5 percent.

It also left the cash reserve ratio for banks unchanged at 4 percent, in line with expectations.

The Indian economy is on track to grow at its slowest pace in a decade, about 5 percent in the fiscal year ending this month, and had been expected to experience modest improvement in the coming year. A recent uptick in wholesale inflation, rising consumer inflation driven by food prices and a record current account deficit limit the central bank’s ability to stimulate the economy, despite pressure from a government that is facing elections in 2014.

“Even as the policy stance emphasizes addressing the growth risks, the headroom for further monetary easing remains quite limited,” the bank said in its statement.

That caution reinforced market expectations that the Reserve Bank of India, which left rates on hold for nine months before cutting them in January, will only lower them a further 0.25 or 0.5 percentage point in the fiscal year that begins in April.

After an initially muted reaction to the widely expected rate cut, Indian stocks and the rupee fell on news that a political party leader, Dravida Munnetra Kazhagam, would leave the governing coalition because of differences over the government’s stand on war crimes accusations in Sri Lanka. Bond yields rose slightly.

The withdrawal leaves Mr. Singh’s coalition at the mercy of smaller parties that are skeptical of changes like land-acquisition legislation aimed at increasing investment in infrastructure.

“As the coalition becomes more fractured and depends on outside support from parties that have a narrow agenda, the very act of policy making gets diluted,” said Abheek Barua, chief economist at HDFC Bank.

The current account deficit reached a record 5.4 percent in the quarter that ended in September and is expected to end the 2012-13 fiscal year at its highest level ever.

“Although capital inflows, mainly in the form of portfolio investment and debt flows provided adequate financing, the growing vulnerability of the external sector to abrupt shifts in sentiment remains a key concern,” the central bank said.

In the government’s budget announced at the end of February, Finance Minister P. Chidambaram said the fiscal deficit would fall to 5.2 percent of gross domestic product in the current fiscal year and 4.8 percent in the next year, targets intended to help stave off a sovereign credit rating downgrade to “junk” status.

Article source: http://www.nytimes.com/2013/03/20/business/global/indian-central-bank-cuts-rates.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,