India pushes 'shock and awe' currency plan to save BRICs


By Ambrose Evans-Pritchard
The Telegraph, London
Sunday, September 1, 2013

India is pushing for joint "shock and awe" intervention by key developing states to halt capital flight and shore up currencies in a move that risks backfiring and triggering a vicious spiral.

"It is going to happen in a matter of days rather than weeks. Brazil and India can start the move," said Dipak Dasgupta, a top Indian official.

Mr Dasgputa told Reuters that China, Brazil, India, Turkey, Russia, and South Africa have all been squeezed as the US Federal Reserve prepares to tighten monetary policy. Joint action would give emerging markets greater firepower, allowing them to deploy their combined $8.7 trillion of reserves and crush "speculators" rather than being picked off one by one.

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However, it is unclear whether such action would serve any useful purpose if the real problem is exhaustion of catchup growth models in these countries and boom-bust credit cycles. "This could backfire," said Ian Stannard, of Morgan Stanley. "If they did this, they would have to sell US and European bonds and that would push up yields. It was rising yields that started this process in the first place."

The side-effect of such intervention would be monetary tightening, pushing countries into deeper trouble. India's growth fell to 4.4 percent in the second quarter, the lowest since the post-Lehman crisis in 2009. This is eroding tax revenues and pushing the budget deficit back over 5pc of GDP, with a ratings downgrade looming.

"We are no doubt faced with important challenges," said Indian premier Manmohan Singh. The rupee is in freefall, crashing 25 percent over the past four months to a record low of 68.84 against the dollar.

"Populist fiscal policies have come back to haunt India," said Kunal Kundu from Societe Generale. Food and fuel subsidies are gobbling up much of the budget, while investment atrophies. India has been living beyond its means, with a current account deficit of 4.8 percent of GDP last year. Mr Kundu said India needs large inflows of capital just to cover its short-term external debt, yet hot money is leaving.

Officials have floated plans to use India's gold reserves as collateral for loans from the International Monetary Fund, but the IMF would demand deep reforms and cuts in subsidies.

"The Indian authorities have made a complete mess of policy," said Lars Christensen from Danske Bank. "They are trying to defend a quasi-peg for the rupee instead of letting the currency reflect fundamentals."

It remains to be seen whether other countries will join forces with India. South Africa has signalled support, but Brazil's central bank said it was unaware of any plans. Peter Attard Montalto from Nomura dismissed the rumours of joint action as "noise" from politicians clutching at straws. "We are very sceptical," he said.

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