The year 2014 has been quite a drag for the Indian economy as it witnessed decade low growth rates during the year. High current and fiscal account deficits and falling rupee led to dismal performance across sectors.
Things could get better with the Modi government now in power. The new Government has got the single largest majority and is perceived to be reform friendly. This seems to have restored some confidence in the Indian economy. And it is quite evident from the way markets are on a tear.
However, even as we all hope for big bang reforms resulting in growth, one factor that we really need to focus on is currency stability. Huge volatility in the currency can deteriorate financial stability. Especially for India at this point of time. As per an article in Livemint, around 70% of the debt on the balance sheet of companies in BSE 500 belongs to net importers. Any depreciation in the rupee is likely to spoil their business prospects and hence debt repayment capacity. This could finally result in their credit ratings getting spoilt as well.
Also, a lot of debt for India Inc is quoted in dollars. So rupee depreciation is likely to increase their liability and their expansion plans. At a time when Indian economy is expecting a turn around, this could be a real dampener for such businesses. As such, even as we hope for faster growth and economic recovery, it should not be traded off with currency stability. In this regard, we believe, unlike the central banks around the world, Reserve Bank of India has been doing a fine job. While maintaining status quo on interest rates has not gone down well with everyone, especially India Inc, we believe that RBI should maintain its focus on inflation and currency stability. As far as growth aspect is concerned, once the supply side constraints are taken care of by the new Government, easing in interest rates can follow so as to ensure a stable economic growth.