Growth, Exchange Rate & Expectations

 Q&A with Outlook (L Nayar)

Q1: Why there is such a marked change in perception about India's growth prospects and improvement in Indian currency since RBI governor Raghuram Rajan took over?

A1: these are two different questions with opposite answers.

 Q1a: Why there is a change in perception about India's growth prospects.

 A1a: Growth prospects have worsened as shown by the GDP data for the first quarter of 2013-14 (April-June). Consequently all forecasters, including the government related bodies, have reduced their forecast for 2013-14 by 1% point or more.

 Q1b: Why there is such a marked change in perception about India's currency and improvement in Indian currency since RBI governor Raghuram Rajan took over?

A1b: There are two reasons. The movement of the dollar above Rs65 was clearly due to pessimistic expectations, a problem that economist call overshooting. Raghuram Rajan the new RBI governor has, through his maiden speech on the first day of taking over at RBI, effectively used his global reputation to remove irrational fears and re-establish RBI credibility. This brought the dolrar below Rs65.  The further movements below this level are due to small positive developments on the external front, like a narrowing of the trade deficit and stabilisation of expectations about future fed actions.

Q2: Have the fundamentals changed in anyway or is it only a change in perception? If so will the change in perception including among private investors bring cheer to Indian economy?

A2: It is due to a change in perceptions of short term financial investors alone. There is little or no change in the perception of long term investors, and the decline in GDP growth coupled with marginal improvements in balance of trade have a negative effect on balance.

Q3: Can a single person - the RBI governor be the change agent or is it unwarranted expectation?

A3: The RBI Governor can only change perceptions regarding aspects that are covered by RBIs mandate and act within its own mandate, which is monetary stability. The governor can also play a more activist role in financial market reform, which will have a medium term effect on efficiency & growth. Raghu's speech gives an indication that he intends to play such a role to promote faster financial development. Beyond this the expectations are unwarranted.