Editorial: Economic growth is silver lining

FPJ EditorialUpdated: Sunday, September 25, 2022, 10:17 PM IST
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The share markets fell for three days straight last week. The benchmark BSE Sensex dropped by 1,021 points, or 1.7% last Friday, the lowest since August 29. Foreign Portfolio Investors were net sellers on all three days, pulling out more than Rs 5,000 crore. The obvious trigger was the 75 basis point hike in the bank rate by the US Federal Reserve last week. With inflation ruling at a three-decade high in the US, the Fed is expected to raise the rate above 4.5%. This will cause FPIs to further withdraw from the Indian markets. Most other western economies too have raised their rates in order to contain raging inflation, worsened further by the fuel and food crisis triggered by the Russian invasion of Ukraine in February. The RBI too has raised the prime lending rate (PLR) to support the exchange rate against the dollar. A strong dollar has resulted in every major currency dropping sharply in value against it, the rupee being no exception. The rupee-dollar exchange rate last Friday breached the 81 per dollar mark before it ended the day at Rs 81.09 thanks to the RBI intervention when it sold billions of dollars to calm the currency market. Analysts expect further pressure on the rupee in the coming weeks as the Fed moves to contain record high inflation in the US. Already this year the rupee has depreciated by 8.2% against the dollar.

Admittedly, most other currencies have lost far more against the dollar but that is small consolation, especially when the RBI has had to offload billions of dollars from the forex reserves to try and moderate the rupee fall. In the first eight month this year alone the RBI has offloaded nearly $90 billion to try and defend the rupee. At the beginning of September the RBI said its reserves of $553.1 billion were equivalent to nine months of imports while the reserves in the same month last year were equal to 15 months of imports. The pressure of the strengthening US currency is such that all major economies have had to raise their bank rates in order to defend their currencies. After two decades the Bank of Japan last week intervened to stop a further run on the yen. Even though the rupee has weakened the least against the dollar, the slide seems unstoppable with more pressure expected in the coming weeks. However, the one silver lining in the bleak scenario is that despite adverse external factors, the Indian economy is set to grow at over 7% this year. Most fundamentals being strong, and India getting a fortunate cushion in cheaper oil imports from Russia despite the sharp rise in global energy prices following the Ukraine war, the Indian growth rate is projected to be the highest among all major economies in the world.

The relatively low share of exports in the economy also helps insulate India against the looming recession in the global economy. Admittedly, the bank credit off-take, also a measure of economic sentiment, has been slow for the corporate sector, most growth coming from retail and micro and small businesses. After the Covid 19 disruption, fresh corporate investment is expected to pick up steam in the coming months. A number of high-value projects in the private sector are in the pipeline which should help boost economic activity. Domestic inflation also shows signs of moderation, though analysts expect another rate hike by the RBI Monetary Policy Committee at its next meeting. The MPC has already raised the PLR by 140 basis points since April this year. More may be on the way soon. Healthy income and corporate tax receipts, including the monthly GST receipts of over Rs 1.40 lakh crore in successive months since the beginning of the current financial year, signal a welcome return to growth after the uncertainty stemming from the prolonged pandemic. Unless unforeseen developments disrupt growth, the Indian economy seems to be doing well under the difficult global conditions.

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