Indian Industry

Dollar Liquidity - Where is it heading in India?

The fast depleting foreign exchange of nearly $50 billion within a short period must be of concern to Reserve Bank of India. We could see less aggressive participation by RBI in the market and the depreciation of rupee to an all time low. The shortage of dollars across the globe is the result of flight of dollars from emerging markets.

India may not realize the expected exports of goods and services and inflow by way of Foreign direct Investment and re entry of Foreign financial Institutions in stock market may fall short considerably in the coming months. Even though nearly $ 40 billion is expected by way of remittance from overseas Indians the trade gap is expected to be nearly $ 50 billion, which need to be offset with short term borrowings and other inflows. Will this happen?

Government of India may have to float sovereign bonds overseas to augment dollar depletion.

Unfortunately the exports which can be very competitive in this environment are affected by lack of demand and buyers overseas are already in serious financial constraints. The anticipated sector specific assistance by Government of India will help the industry to sustain and avoid loss of jobs.

The spending will be slow to come out due to lack of sentiments across the globe and in India even though the liquidity has been pumped into the banking system, there is no demand to avail the loans as the interest rates are ruling still high. The bankers who have mobilized deposits at higher rate will be reluctant to lend at lower than deposit rates and are more cautious to whom they are lending. This can adjust over time and immediate results cannot be expected.

The stock market is very critical barometer for the industry to move forward as the sentiments of stock market reflect the global volatility and fear across the globe and Indian Industry is no exception. The Industry mantra is now to consolidate and curtail spending.

Therefore Government higher spending in infrastructure projects like power, roads etc and other social schemes will stimulate consumption across sectors. To meet the short term need to sustain the industry the sector specific approach of the Government is correct move.

The likely scenario for the industry could be:

- The import could be expensive and advantageous to domestic industry.
- The exports will be more competitive due to rupee depreciation
- Higher investment cost for import oriented projects.
- The reduced foreign direct Investment.
- The mismatch of supply and demand

India with large domestic market can maintain the present production levels and avoid job losses with suitable policy initiatives by the Government. Even in this crisis there is an opportunity for the Industry.