Economist Pronab Sen's prescription for the uncertain state of economy

Q1. The RBI is taking a series of steps to attract foreign flows and protect the rupee amid depleting forex reserves. It is acting across three channels – the banking deposit, the FPI debt, and the ECB. Will these measures be enough?

Ans:

>RBI signalling that world economic turmoil to last longer than expected

>RBI and govt ensuring that private debt repayments don’t go against India

>Creating framework for compensatory inflows

Q2. Of the 621 billion dollars of external debt, over 40 per cent is due for repayment in the next nine months. This will be equivalent to about 44 per cent of the country’s forex reserves. First, is this bunching up of repayments par for the course? And if not, how will this play out going forward?

Ans: 

>The present situation is unusual 

>Huge external commercial borrowings by India Inc after 2008 crisis

>Economy presently facing forex and inflation pressure

>RBI’s inflation targeting will address some of these pressures

>Pressure will emerge on growth front, instead of inflation or forex

Q3. Current account deficit is seen doubling to 3 per cent of GDP this year and the rupee hitting 82 a dollar by the third quarter before recovering. Given these, how has the RBI fared in managing the rupee’s fall and are its CAD measures adequate?

Ans:

>Rupee hasn’t depreciated against basket of currencies due to strong exports

>Global monetary tightening and likely recession in importing countries could change scenario

>People worried about rupee’s fall could be in for a shock in the near future

Q4. Do you get the sense that authorities like the RBI are behind the curve in tackling economic headwinds and are playing catch up?

Ans:

>RBI waited too long to express concerns on inflation

>Sudden off-cycle rate hike made it look like RBI was taken by surprise  

>Worried about RBI’s image

 

Q5. I will have to press you on the current account deficit... 

Ans:

>3% CAD not that alarming by Indian standards

>Domestic inflation is of greater concern

>Controlling inflation will also correct CAD problem