2018 ver­sus 2013: The déjà vu, the dif­fer­ence and the pol­icy dance

Mint Asia ST - - Mark To Market -

In­dia’s ex­change rate has de­pre­ci­ated more than 13% so far in 2018, ex­ceed­ing its ear­lier fall of 12% dur­ing the mar­ket tur­moil of 2013. Does that mean that we are worse off now than at that time when the coun­try was clubbed to­gether with the frag­ile emerg­ing economies?

Be­fore an­swer­ing the ques­tion, let us ex­am­ine what was sim­i­lar and what is dif­fer­ent then and now.

Déjà vu

In some pa­ram­e­ters, the two episodes have strik­ing sim­i­lar­i­ties. Both episodes were trig­gered by the sud­den hos­til­ity of in­vestors to­wards emerg­ing mar­kets. The ex­change rate was at the heart of the melt­down both times. The col­lat­eral dam­age was the bond mar­ket five years ago and it is suf­fer­ing even now.

The ad­join­ing chart shows how dif­fer­ent mar­kets be­haved in the two episodes of melt­down. The mar­ket be­hav­iour eerily res­onates with what hap­pened dur­ing 2013. The change in crude oil prices does not seem high in 2013; note that crude oil was al­ready more than $100 a bar­rel back then.

While In­dia was among the frag­ile five at the time, its cur­rency wasn’t the worst per­former. Fast for­ward to to­day, and the ru­pee is among the weak­est per­form­ers in Asia.

It’s dif­fer­ent...

There is some merit in the view that the


78.3 two pe­ri­ods of tur­moil are dif­fer­ent. And the dif­fer­ence is not the fact that In­dia is now a stronger econ­omy with a large forex re­serve stock­pile as a shield. Five years ago, the bright spot of In­dia was the dol­lar in­flows into its eq­uity mar­kets. This year, for­eign fund out­flows have been mas­sive.

One of the stark dif­fer­ences is how pol­i­cy­mak­ers be­haved in In­dia. Dur­ing the ta­per tantrum of 2013, the Re­serve Bank of In­dia (RBI) went be­yond the usual to tackle a fall­ing cur­rency. It tight­ened liq­uid­ity with new mea­sures al­most ev­ery month be­tween May and July so that the pre­mium of the ru­pee in­creases. The cen­tral bank even re­sorted to cap­i­tal con­trols by curb­ing the amount In­di­ans could re­mit abroad. These mea­sures, though salu­tary for the cur­rency, con­veyed the mes­sage that RBI had lost con­trol over mar­kets.

This time around, RBI has re­stricted it­self to just ba­sic in­ter­ven­tion in the forex mar­ket and its mea­sures on eas­ing dol­lar bor­row­ings have been in line with ex­pec­ta­tions.

Not sur­pris­ingly, the mar­kets have re­acted the same way, dis­re­gard­ing any salve. Per­haps the only way for pol­i­cy­mak­ers is to ride out the storm.

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