India’s currency woes will impact on Bhutan, with whose Ngultrum it shares parity
Foreign Exchange Rate: Market sentiments in India have failed to improve, with the Rupee continuing to weaken against the US dollar, despite a host of radical reforms introduced two months ago by the Indian government to address a growing deficit.
Even before the introduction of the much-awaited reforms, the rupee averaged 54-55 against the USD. It is hovering in the same exchange rate today.
The reforms include opening up the retail sector to foreign players, reducing government subsidy on diesel and LPG, hiking diesel prices, liberalising foreign investment rules in the broadcasting sector, and allowing foreign stakes in the country’s airline industry.
Some of these reforms had a direct impact on the Bhutanese economy, as it also experienced increased diesel prices.
As soon as the reforms were announced, the rupee strengthened to 51.32 against the dollar. However, it lasted only for a month.
Important global developments, continued concerns over the Euro zone, and increase in global fuel prices have factored the rupee’s fall.
Some newspapers in India attribute the cause to the reelection of President Obama, who had promised to bring an end to the tax breaks the US citizens enjoyed since the time of George Bush.
This would lead US citizens to pay higher taxes. The president also announced spending cuts, starting 2013, to manage the economy’s skyrocketing budget deficit.
Spending cuts would mean fewer investors from US to the outside world; this would entail lower fund flows to India as well.
Another speculation was the impact of Hurricane Sandy, as people become more concerned about the safety of the US dollar. According to one estimate, the hurricane damaged property worth USD 20B.
The Indian economy continues to struggle under huge deficits, with mismatch over revenue and expenditure. According to one estimate, the government has been borrowing Rs 20B a week from the local bond market to ease rising fiscal deficit. Another additional Rs 20B borrowing is being considered, if the situation worsens.
Bhutan is also yet to receive Rs 4B loan from India after the limit on the government of India line of credit was enhanced to Rs 10B.
Government officials said that one reason why it is taking such a long time was because economic situation in India was also getting no better.
Economic woes in India directly impact on Bhutan, as the two currencies are pegged. Bhutan also has the largest trade integration with India.
If the rupee continues to perform as it is doing today, financial astrologers predict that inflation would rise, as prices of raw materials procured from third country become expensive.
India imports spare parts and raw materials from third countries, for which it pays in dollars. The spare parts are then assembled in India, and sold to other countries, including Bhutan.
Companies, importing spare parts and raw materials from third countries, include majorly motor vehicles and electronics firms.
Another impact would be felt on the prices of crude oil. Prices of oil would increase, if Indian oil companies landed up paying extra as a result of a weak rupee.
By Nidup Gyeltshen
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