From Breakingviews - India’s crisis buffers are part optical illusion
Rocketing costs of imported food and energy will nearly triple the current account shortfall to 3.2% of GDP by March, Emkay Global estimates. Meanwhile, the fiscal shortfall remains high at over 6% of output, limiting room for further spending. The rupee has softened 6% to trade around 79 per dollar in 2022, a new record.
Fiscal and monetary policy have necessarily diverged. The government has extended a free food scheme until September and slashed taxes on fuel to ease living costs, but the finance ministry’s expenditure department warns against further generosity. To restrain consumer price inflation that touched 7% in June, Reserve Bank of India Governor Shaktikanta Das hiked benchmark interest rates.
India’s currency problem is not unique, and the economy is in better condition compared to other developing countries, in part thanks to its push to clean up bad debt before the Ukraine crisis hit. Policymakers had managed to kill off an earlier so-called twin balance sheet problem, of which the fiscal deficit was one half, by slashing bad corporate debt to a six-year low as of March.
The rupee is trading around 79 per dollar, weakening 6% since the start of the calendar year. That compares to a 5% softening in the Indonesian rupiah and 7% by the Thai baht. Consumer prices including food and fuel will rise 6.7% in the full year to March, the Reserve Bank of India estimates. India targets 4% inflation with a tolerance band of plus or minus 2 percentage points.Editing by Pete Sweeney and Thomas Shum
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