India fighting worst crisis since ’91 limits capital flows

1990s Crisis

The rupee’s decline is a reminder of the crisis in the 1990s when the widening deficits in the budget and current account pushed the currency down 37% between 1991 and 1992. The government secured an emergency loan of $2.2 billion the IMF by pledging 67 tons of India’s gold reserves as collateral. Growth slowed to 2.1% in 1991, from 5.6% the previous year.

Assistance from the IMF led then finance minister and now prime minister, Manmohan Singh, to open India’s economy to foreign investment. Since then, economic growth has accelerated, with GDP expanding more than 9% in each of the three years through March 2008 compared with 3.7% between 1950 to 1973.

The country is in a better position to counter a crisis, with $277 billion foreign reserves, enough to cover more than six months of imports, according to data compiled by Bloomberg. That compares with less than two months of import coverage in 1991, according to a RBI report in August 2012.

Growth Slowdown

At the same time, the economy is posting its slowest growth since 2003, expanding 5% in the year ended March 2013. Last month, the RBI cut its growth forecast for the year through March 2014 to 5.5% form 5.7%.

India’s currency defense will raise borrowing costs for the government and companies, slowing economic growth further, according to Michael Shaoul, chairman of New York-based Marketfield Asset Management LLC.

“It is historically very difficult to defend a currency when you have large current account deficit,” Shaoul, who helps manage $13 billion in assets, said in a phone interview from New York yesterday. “These measures are not really helpful as they are going to do damages to the local economy. The real danger is that foreigners start to withdraw more capital and you start a vicious cycle.”

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