India is Fighting the Slowdown

Only a few months ago, India’s government was confident that the country was on its way to reach a two-digit growth rate. But with the ongoing global financial crisis squeezing bank’s liquidity and cooling the country’s exports, India’s economy is heading to a sharp downturn.

Last year India’s stock market nearly collapsed, losing 54% of its value and prompting foreign investors to withdrawal its capital and stop financing new investments. Moreover, the worldwide downturn has accelerated the currency depreciation, as Indian companies unable to raise capital abroad, have been turning to Indian local banks for money. To support the currency, the Reserve Bank of India has been selling its foreign-exchange reserves, which so far have dropped by nearly $64 billion from a high of $316 billion at the end of May. All this, connected with two years of rising interest rates, has brought India its own credit crunch. To make things even worst, the wave of economic destruction has started hitting the real economy. India’s industrial production dropped 1.2 percent in February from a year earlier, the most in more than 14 years. Exports plunged by a record in March, extending the longest declining streak in a decade.

However, even though there are plenty of reasons to be pessimistic, India’s government has still a chance to revive the deteriorating economy. The central bank had lowered the reverse repurchase rate by 275 basis points and its repurchase rate by 425 basis points since October. In addition, between April and September, the bank will inject 1.2 trillion rupees ($23.8 billion) of cash into the banking system by purchasing government bonds via auctions and buying back market stabilization bonds, which were sold in the past four years to drain money from the economy. Moreover, so far the government has announced two stimulus packages, which include tax cuts, the injection of capital into banks, and allows overseas investors to double purchases of debt. Most importantly, more help is expected to come with the new government, which will emerge at the end of May.

Anna Fedec,
4/23/2009 7:37:31 AM