Sensex has tanked down below 23000 level, lakhs of crores of rupees of wealth has been lost and there seems to be no respite looking ahead. Analysts and Newspapers have already started comparing the present situation with what happened during the 2008 crisis. But India is in a much better position to deal with any such turbulence -
- Mr. Jaitley can loosen the purse strings, this year's fiscal deficit being around four percent, it leaves enough room to pursue a Keynesian type pump priming.
- Interest rates being high, Raghuram Rajan too can help by loosening the monetary policy lever, given low commodity prices are going to be sustained in the foreseable future. Inflation is thus not at the top of everybody's minds.
- Our war chest of $350 billion in terms of forex reserves is very well intact. Although some people will doubt its usefulness if there is a speculative attack on the rupee, our central bankers are wise enough to make its use at the right moment in the right proportion. Moreover, with a floating currency we hardly need to think of the 'right' level of the rupee. Given the current level of the rupee there is a justifiable case to let the rupee depreciate further, to make our exports competitive, given other emerging market currencies have already depreciated.
- Lower commodity prices again mean that Current Account will not come under pressure even if our exports come down by 50% (they have actually fallen by 18% between April and December 2015 but CAD was still less than 1% in 2015). Econometric evidence shows that a 2-2.5% CAD is manageable, even healthy at the present stage of development for the Indian economy. Moreover stable FDI inflows are at a record high.
- Short term debt to total external debt ratio has fallen to 17.8% last year, the lowest in the past 8 years. Short term debt is considered to be riskier as it has to be paid immediately in foreign currencies.
- External Commercial borrowings by corporates are increasingly being hedged. RBI reports that the hedging ratio for Indian financial firms has increased from 15% a couple of years earlier to 41% as of October 2015.
- Around 70% market share of the Indian banking is in public sector hands. Being owned by the sovereign, a run on the banks is just not imaginable In case of a crisis, the government is anyways available to re-capitalise them.
