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5 things about India amidst global turmoil
The governor and deputy governors of the Reserve Bank of India often make public speeches. They put out very interesting data and give us a peek on the thinking at the central bank about the economy.
Recently, Harun R Khan, deputy governor of RBI, made a speech explaining the impact of the turmoil in the global economy on India.
Here are 5 pointers that explain the impact:
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China concerns
The slowdown in China has hurt demand for commodities across the board. Deputy Governor Khan argues that following the global financial crisis in 2008, China supported a global demand for commodities like metals and oil to support the build up of infrastructure. However, from the middle of 2014, the Chinese demand slowed. Countries dependent on Chinese imports like Brazil and South Africa saw a dramatic slump in economic prospects. India being less dependent on the Chinese demand, suffered less.
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Money pulled out of markets
Foreign investors pulled out money from emerging markets since January 2015. Mr Khan argues that the sharp surge in prices of gold and US treasuries suggest a ‘risk off’ sentiment. This means money has been pulled out markets like China, India, Brazil and moved into safe haven investments. India has witnessed a net outflow of $15 billion in 2015-16 against a net inflow of $41 billion in the year ago period of 2014-15.
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Indian economy
The International Monetary Fund and World Bank hail India as a beacon of growth. Both IMF and the World Bank in their January 2016 outlook project India to grow at the highest rate among major economies in 2016 and 2017. Despite falling exports and low industrial production, India’s growth trajectory remains on track, said deputy governor Khan. “Importantly, such growth has been accompanied by macro-economic stability,” he added.
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Rupee stands tall
The Indian rupee held up as India did not lose sight of the balance of payments. The current Account Deficit (CAD) narrowed to 1.4% of GDP in the second quarter of 2015-16 from the high of 4.8% in 2012-13. Despite the pullout of foreign institutional money, inflows from foreign direct investment in 2015-16 and remittances from non-resident Indians kept the rupee stable. The Indian rupee fell only 5.2% in the past 15 months. The Brazilian currency fell 27% while the South African currency shed 25.5% in value. The Turkish and Russian currencies took a hit of over 15%.
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Vulnerability remains
Deputy governor Khan observes in his speech that although India’s foreign exchange reserves are at almost record high levels of $350 billion, the external sector vulnerabilities have not completely disappeared. India’s external debt has increased to $483 billion by September 2015 from $446 billion as at end-March 2014. “Foreign exchange reserves provide 72.5% cover to external debt. In case of China, foreign exchange reserves are 404% higher than external debt. The number is much lower at 30% in countries like Brazil and South Africa.
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6.5%
The volume growth of non-oil import demand of India’s major trading partners is expected to be 6.5% over the next 5 years, according to an IMF study on India’s exports highlighted by RBI deputy governor Khan in his speech. This is lower than the average 10% growth witnessed between 2001 and 2008. The study argues that India’s exports remain vulnerable to a global slowdown.
