India's Currency Drops Following U.S. Fed Shift In Policy

Aug 26, 2013
Originally published on August 26, 2013 5:06 am
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Talk of the U.S. Federal Reserve shifting policy has also helped push down the value of India's currency, the rupee. To talk about why, we called Amy Kazmin, she's the New Delhi correspondent for the Financial Times. She told us that the impact of the Fed's impending move is forcing India's government to face up to some fundamental problems.

AMY KAZMIN: India doesn't have a very strong export industry. They do have some high-tech industries, like IT services and call centers. But the fact of the matter is India still is heavily reliant on imports and does not export enough to cover the cost of those imports. Until now, India has found it easy to attract the money that it needed to pay for its imports without draining its own foreign currency reserves. But with the talk of the Fed tapering, a lot of liquidity is leaving and suddenly, there's real questions about how India is going to finance what it wants to buy from the world. And the result of that is that its own currency, the rupee, has been absolutely hammered.

MONTAGNE: OK. So how is that affecting people's lives there?

KAZMIN: Well, the rupee has depreciated very strongly just in the last few months, ever since the U.S. Fed started talking about changing its monetary policy. And the result of that, of course, is that anything that Indians want to buy from the rest of the world is suddenly a lot more expensive.

Now this is hitting the middle-class Indians quite hard. They've gained a taste for travel abroad, for more imported electronic gadgets. They increasingly are sending their children overseas for higher education. Suddenly, all these things are a lot more expensive. The other very heavy blow, though, is India is heavily dependent on imported fuel; all of which is, of course, purchased in dollar-denominated prices. The fact that the rupee has plunged in value against the dollar means that the fuel import bill is going to surge, and that means the government either has to raise fuel prices or it's going to have its own widening fiscal deficit as it subsidizes the cost of fuel to avoid passing on the rising global price to the Indian consumers.

Raising fuel prices in India is very politically unpopular. Everyone depends on imported fuel - from people in fancy cars to farmers who use diesel to run their water pumps to irrigate their fields.

MONTAGNE: Well, tell us what the government has done so far to try and stop India's currency from getting even weaker.

KAZMIN: Well, India's government has responded to the crisis by really trying to focus on what it can do to reduce the import bill. Now, Indian travelers often have a habit of bringing back large electronic items, like flat-screen TVs with them when they travel abroad because if they buy them at home in their own country they carry heavy import duties. So recently, they've just announced that Indian travelers won't be able to bring in flat-screen TVs without paying in import duty on them. But to be honest, this is a very small and almost silly measure.

MONTAGNE: So these stopgap measures don't really address the big vulnerabilities that you've described for us.

KAZMIN: That's right. What economists are consistently making the point is that what really is going to solve India's problems is very serious long-term economic reforms that would allow in greater amounts of foreign direct investment to help India build up its own manufacturing and export capacities, ending a very expensive system of fuel subsidies. So India really has to undertake long-term reforms, very serious structural reforms. The problem with that is that a lot of these reforms, like raising fuel prices and ending fuel subsidies, are politically unpopular. And India is facing an election in less than a year, and the Congress-led government might just not have the political will to do what it takes to end this crisis.

MONTAGNE: Amy Kazmin is a New Delhi correspondent for the Financial Times. Thanks very much for joining us.

KAZMIN: Thank you. Transcript provided by NPR, Copyright NPR.