Expert Zone

Straight from the Specialists

Asian financial crisis and lessons for India

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(Any opinions expressed here are those of the author and not of Thomson Reuters)

Several economists have gone to great lengths to say that India in 2013 is not facing a repeat of the 1991 balance-of-payments crisis or the Asian financial crisis in 1997. Clearly, the crisis India faces now is unique – as most economic crises usually are.

That does not mean there is nothing to be learnt from past crises. We believe there are several similarities between the Asian one and India’s situation today.

There are many reasons and theories attributed to the cause of the Asian crisis. Some of the common factors in the affected countries, in varying degrees, were – high current account deficits, semi-fixed exchange rates, extremely high dependence on foreign capital inflows & borrowings, inefficient asset creation, crony capitalism and undercapitalized banks.

When panic struck, the central banks in the region tried desperately to defend their currencies from depreciating in the face of capital flight. The defence was ultimately unsuccessful and the currencies depreciated between 50 and 80 percent in a few months, busting many large corporates and banks that had direct or indirect foreign exchange liabilities.

The rupee on a crash course

(Any opinions expressed here are those of the author and not of Thomson Reuters)

Given the kind of volatility in financial products and asset classes that we have seen in India and some emerging markets over the last few weeks, it’s likely to be a long winter for the Indian economy.

The rupee is at an all-time low against the dollar, FIIs are big sellers in Indian debt and equity markets, the Sensex is falling and bond yields have risen. Adding to India’s misery, there’s no sign of inflation easing or interest rates coming down in a hurry. The twin deficits – fiscal and current account – are at levels that could expose the economy to a potential rating downgrade.

Time to get used to a weak rupee

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(Any opinions expressed here are those of the author and not of Thomson Reuters)

The fall of the rupee has become politically embarrassing. When the rupee crossed 60 to the dollar, the government and the Reserve Bank of India (RBI) thought it was time to act. The RBI tried to suppress speculation that had exaggerated the rupee’s fall and the government sought to increase foreign resources to fund the current account deficit (CAD).

The RBI complied half-heartedly. “We let our exchange rate be largely market determined, but intervene in the market to smooth excess volatility and/or to prevent disruptions to macroeconomic stability,” Governor Duvvuri Subbarao said in a speech in London.

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