Rescue Measures for the Rupee
On June 5, Indian authorities implemented a series of measures to stabilize the rupee. These included:
- Subsidies for state-owned companies taking overseas loans.
- Introduction of a new dollar-deposit scheme for non-resident Indians, similar to one from 2013.
- Removal of restrictions on foreign investment in bonds and equities.
- Tax exemptions on foreign investment in government bonds regarding interest and capital gains.
Underlying Causes of Rupee's Weakness
Despite these measures, skepticism remains due to underlying issues:
- The rupee depreciated by over 6% against the dollar last year.
- India's economic growth is nearly 8%, yet foreign investments are being withdrawn.
Key Challenges
- The China Shock:
- India was expected to benefit from global manufacturing shifting out of China, but this has not materialized significantly.
- Gross FDI in India decreased from 3.6% of GDP in 2008 to less than 1% by 2024.
- Vietnam has benefited more from the China+1 strategy, with its FDI ratio surpassing 5%.
- Indian firms are investing abroad, with outward FDI doubling over two years to over $30 billion in 2025-26.
- AI Shock:
- India lags behind the US and China in AI development.
- The Nifty IT index fell by roughly 22% over the past year.
- IT firms have laid off 40,000-50,000 employees since 2024.
Implications and Adjustments
The combined shocks highlight vulnerabilities in India's growth narrative, particularly in manufacturing and IT services. This has led to weakened FDI and portfolio flows, insufficient to cover the current-account deficit, currently around $100 billion annually. There are two potential responses:
- Asset Price Correction: Lower the prices for Indian assets to reflect weaker growth prospects, which might attract foreign capital eventually.
- Restoring Economic Confidence: Requires decisive measures to boost investment and recognize investor concerns.
The summary reflects the personal views of an associate professor of economics at IGIDR, Mumbai, and does not necessarily represent the views of Business Standard.
