“So, on the rupee, yes, the rupee has been weak for almost the entire year. It has been one of the worst performing currencies in Asia or the EM pack,” Chachra said. She added that, based on the real effective exchange rate, the rupee is undervalued after depreciating by more than 7-8% annually.
Chachara highlighted the role of the capital account, noting, “What affects the rupee is largely related to the capital account and capital inflows which have been very weak for most of this year. We have seen incessant FII outflows not only last year but this year as well. At the same time the net FDI numbers have been weak and we are weaker because of the recovery.”
While the current account deficit has increased marginally, Chachra said it remains well within comfort levels. “The current account deficit has widened but not massively, at 1.3% of GDP. We call the comfort range for CAD in our mind 2% to 2.5% of GDP,” she explained. Uncertainty in India-US trade talks is adding further pressure, but Chachra noted that a moderate devaluation could help export competitiveness.
On the domestic growth front, GDP growth of 8.2% in the September quarter was a surprise, driven by strong manufacturing and resilient services. However, high-frequency indicators paint a mixed picture. “Some of the other high-frequency data points, you’ll see that the trend for the September quarter is more mixed. There are signs of a pickup but it’s hard to reconcile the strength we feel and see with probably 8% real GDP growth,” she said.
Chachra also addressed concerns surrounding the October Index of Industrial Production (IIP) data, which showed modest growth of 0.4%. She attributed the weak number to seasonal factors associated with the holidays, noting that adjusting for lost workdays would have led to about 6% growth. “I don’t think we should look at the October figure and get too worried… most indicators point to a gradual recovery in the economy,” she concluded.
With capital flow pressures and seasonal fluctuations affecting high-frequency data, Chachara stressed the importance of looking at macro indicators in context. “It would be better to look at October and November on average when we get November data to assess the final growth or underlying growth momentum,” she added.
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