It is remarkable how much the outlook for the Indian economy has changed in the last two months or so. On August 28, when the rupee hit a record low of 68.36 to the dollar, the Sensex closed at 17,996. Since then, the rupee has appreciated to around 61.90, while the Sensex has reached a lifetime high. The apparent shift in perception is also reflected in the behaviour of foreign institutional investors (FII), who were net sellers of Indian equities and debt to the tune of $13 billion during June-August. But since September, they have made net investments of over $1.6 billion.
What accounts for this small but possibly significant turnaround? Management of the external economy, particularly after Raghuram Rajan took over as Reserve Bank of India (RBI) Governor, is certainly a reason. Whether or not pure coincidence, India’s foreign exchange reserves have risen by $8.1 billion since September 6 (two days after Rajan assumed charge). This is despite the RBI, in late-August, opening a special window for oil companies to meet their entire daily forex requirements towards crude imports. While helping to stabilise the rupee by taking significant dollar demand off the market, it would have also drained the RBI’s own forex reserves. That is where Rajan’s move to allow banks to swap their dollars mobilised against FCNR(B) deposits and overseas borrowings at a fixed 3.5 per cent annual rate — as against current forward premiums of 7.5 per cent — has proved a masterstroke. The concessional swap facilities, open till November 30, have already brought in some $13 billion to the RBI’s coffers. At the end of it, the rupee has strengthened even as official reserves have gone up.
While arresting the rupee’s free fall has been the key to confidence returning, the real test will come when oil companies restart dollar purchases from the market and the RBI also closes its swap windows for banks. That requires the buoyancy in exports to continue. Equally important is to keep receiving FII inflows, which will happen only when the Indian economy shows clear signs of growth. Right now, some green shoots are visible in the form of exports and the index of the eight core industries registering an impressive 8 per cent annual growth in September. But for these shoots to grow further, they need a nutrient in the form of a revival in investments. The Cabinet Committee on Investment has apparently ‘resolved’ issues relating to statutory clearances for 99 projects involving Rs 3.68 lakh crore worth of investments. The Government needs to equally ensure that these projects now take off the ground. Once the economy is back in the growth groove, it will be less vulnerable to a speculative attack from a US Fed tapering and other external shocks.