[Ed] Budget cues

India’s forex reserves have hit an all-time high of $322.14 billion, even as its current account balance seems set to turn positive this quarter and the rupee is among the few currencies strengthening against the dollar. To appreciate these developments, one must only rewind to end-August 2013, when reserves had depleted to $275.5 billion, the rupee had plunged to 68.8 to the dollar and the preceding four quarters had reported average current account deficits of over $23 billion each. The last time India recorded a current account surplus was in January-March 2007.

Whether or not we are re-entering a period of current account surpluses, one thing is clear: the rupee and deficits aren’t posing the worries that they did not too long ago. The problem then encompassed the rupee’s external as well as “internal” purchasing power, thanks to double-digit inflation. The RBI was compelled to raise interest rates, on account of high domestic inflation as well as to prevent speculators from “shorting” the rupee. But today, with consumer price inflation easing to around 5 per cent and official forex reserves bolstered to thwart any speculative attacks on the rupee, the RBI has headroom to cut interest rates.

The above turnaround, of course, owes primarily to global crude prices. A nearly 60 per cent decline over the last eight months translates into annual forex savings of over $80 billion. Low oil prices are also the main driver for the disinflationary pressures currently gaining momentum. This virtuous combination — a strong rupee, balance of payments stability and low inflation — is an opportunity that the present government must exploit. The US president’s just-concluded visit, the IMF projecting India’s growth rates to overtake China’s in the next couple of years, a successful Vibrant Gujarat summit and macroeconomic and political stability have all helped significantly raise the country’s economic profile. The global investor community is once again looking at India as a place to do business in. The budget should reinforce this faith by redoubling the government’s commitment to growth, reforms, fiscal consolidation, and a stable and predictable tax regime.

Source - Indian Express