India currency challenge no reason to disengage, says Matthews Asia

Matthews Asia manager Sharat Shroff says that misguided responses from Indian policymakers to the rupee depreciation does not mean investors should ignore the ongoing investment story developing in the country.

Shroff’s comments come after significant weakness in the Indian currency, sparked by concerns of the impact of tapering of monetary stimulus in the US.

The impact has been felt by investors, with the likes of the MSCI India, BSE Sensex, and India Nifty 50 indices down about 14% in the past month, and down by up to a fifth over the past three months.

Shroff believes that the currency crisis could spark much needed reforms. For investors, however, the danger remains of misguided policy responses, he adds.

“Recent measures announced by the Indian government and the Reserve Bank of India (RBI) suggest that policymakers are viewing the rupee movements as a short-term issue while paying less attention to some of the structural problems confronting the economy. Hence the measures seem to focus on reducing the country’s need for US dollars. The efficacy of such measures is questionable.”

“The government may be aiming to plug the gap in funding India’s current account deficit by increasing reliance on shorter-term sources of funding. While these measures may work in the interim, there must be a concerted effort to attract more sustainable sources of capital, and that can be achieved by easing the cost of doing business and by improving domestic business competitiveness. Unfortunately, the country’s attempts to improve competitiveness in recent years have been half-hearted.

“The silver lining to all this is if recent events can become the impetus for Indian policymakers to pay attention to longer-term objectives of improving competition and productivity within the country.

“We continue to believe that the underlying attraction to investing in India remains intact, and may get a boost with a more thoughtful framework for economic reform.”


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