October 3, 2012
Reposted from Kuensel
The Indian rupee appreciated against the dollar by around Rs 2 this week, reaching Rs 52.77, following improved market sentiments, as a result of several reforms in India foreign direct investment policy.
This has a direct bearing on the Bhutanese economy, which not only has the Ngultrum pegged at parity to the Indian Rupee (INR), but is also its largest trading partner.
Analysts said that opening up the retail sector to foreign players, reducing government subsidy on LPG, and hiking diesel price, liberalising FDI rules in the broadcasting sector, and allowing foreign stakes in the country’s airline industry, have brought about the appreciation.
The rupee hit an all time low against the dollar throughout this year, from the effects of the global economic slowdown, the Euro zone crisis and lack of policy reforms, leading to decreased inflow of foreign funds into the Indian market.
With the rupee not showing any signs of improvement, radical measures were put in place to control prices and fiscal deficit.
The first multi national company to respond to these reform measures has been Wal-Mart, which is the world’s biggest retailer. The multinational plans to open up retail outlets in India within a year from now, according to Indian media reports.
Other companies such as Tesco PLC, which is a British multinational grocery and general merchandise retailer, and French retailer Carrefour also expressed interest to enter India.
These reforms have prompted foreign investors to pump in more than USD 1.67B in the country’s equity market in September this month.
More investment is also expected as the Indian government plans to increase minimum foreign equity investment from 26 percent to 49 percent in the insurance sector.
Reducing government subsidy on diesel and LPG also helped contain fiscal deficit, leaving the government with more money to spend and ease pressure on the external sector.
Local economists said that any developments in the Indian economy would indirectly replicate in Bhutan.
The impact is already being seen in oil prices. The Indian government is contemplating reducing prices of petrol this week, as a result of the appreciating rupee.
India imports 80 percent of its oil requirements from outside, for which it pays in dollars. With the rupee appreciating, it means imports have become cheaper.
A decrease in oil prices would also help contain inflation as prices of products become cheaper because of lower transportation cost.
A lecturer with the Royal Thimphu College, Sanjeev Mehta, said Bhutan’s import bills are also expected to drop significantly as a result of this new development, which will have a positive impact on the balance of payments.
Another economist said that India was largely an import-driven economy, as it imports raw materials and spare parts to make finished products, and then sell to other countries.
Its import bills on sourcing raw materials and spare parts will come down and, therefore, when Bhutan imports those items from India, it will become cheaper, he said.
When the rupee depreciated against the dollar earlier this year, Indian manufacturers, mostly motor and electronics, suffered huge losses, as their payments to source spare parts increased drastically.
Sanjeev Mehta said that another positive impact would be felt in terms of payments made on the borrowings from third countries.
However, he said, that it was too early to expect any end results, as it was not sure whether the rupee would stabilise. “It has been fluctuating for quite some time, and it might again depreciate,” he said.
He said that it was however not a good time to sell dollar reserves to increase rupee reserve.
Initially, around mid this year, the Indian government faced stiff resistance from the public, the opposition and even its own coalition allies, when it announced plans of opening up the retail sector to foreign players.
Therefore, the revision was made, based on several consultations, and has become more restrictive than planned.
Critics said that allowing FDI in the retail sector would not provide a level playing field and local retailers would lose out.
Indian retailers avail loans for their businesses from Indian banks at 12 percent to 13 percent interest rates, while in the United States the same businesses enjoyed 3.3 percent interest rates, allowing them the opportunity to sell at more competitive rates.
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