It is baffling that a country that has only about $6 billion by way of foreign-currency-denominated sovereign debt is so hung up about its alignment with global interest rates. India has, over the last 22 years, attracted large amounts of growth capital by way of equity inflows, while it consciously kept a check on external sovereign borrowing.
It is another matter that many Latin American and ASEAN countries continue to depend largely on external sovereign funding, not having learnt from the mistakes of the past. In our country, the stock of outstanding equity owned by foreign institutional investors (FIIs) is more than 10x that of their debt holdings. Indeed, it was none other than Dr D Subbarao who said at his I G Patel memorial lecture at the London School of Economics earlier this year that the classical interest-rate defence of a currency might not work in India due to this peculiarity.
The outflows of money and consequent 13 per cent depreciation in the rupee that we have seen since July 15 have more to do with expectations of a solvency crisis in the financial sector, rather than interest rate differentials.
In fact, the Reserve Bank of India might eventually be forced to cut local rates by boosting liquidity, rather than curbing it, in order to bring the rupee back to fair value. India's credit/gross domestic product ratio at about 53 per cent is among the lowest among major economies, irrespective of their stage of development.
It is, thus, a shame that about 10 per cent of our bank loans have gone bad, as if we had a major problem of overcapacity and malinvestment. This is in no small way the result of flawed monetary policy, with too much focus lent to the liability side of banks rather than the maintenance of a fine balance of focus between their assets and liabilities.
Rohan Soares Mumbai
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