Indian Prime Minister Manmohan Singh’s coalition government was reduced to a minority when the feisty West Bengal chief minister Mamata Banerjee’s Trinamool Congress decided to pull out of the ruling coalition on September 18. But the political crisis didn’t spook the market. The benchmark Sensex index of the Bombay Stock Exchange rallied and is on an upward curve.
The Indian rupee, too, is rising against the dollar.
Is it likely that Manmohan Singh deliberately courted a political crisis to strengthen the Indian rupee and the market?
Consider what caused the crisis.
Manmohan Singh and his finance minister, P. Chidambaram, launched big-budget economic reforms without consulting allies like Mamata Banerjee. She quit the ruling coalition in protest, but that didn’t bother the market, which saw her as an obstacle to reforms.
She is not the only politician who has protested against the diesel price hike, the cap on subsidised cooking gas cylinders and the decision to let foreign supermarkets like Wal-Mart and Tesco enter India. The entire opposition and even some of the partners of the ruling coalition are up in arms. They are concerned the price hike will hurt the common people and the entry of foreign supermarkets will push mom-and-pop shops out of business.
But the stock market rally shows investors like the so-called “big bang”, “big-ticket” reforms.
Mamata Banerjee accused the government of selling out to America.
It’s true America has been pushing for economic reforms.
But India has to reform to reduce its fiscal deficit, says Manmohan Singh.
It seems he is right. For the Indian rupee has been rising against the dollar since the economic reforms.
The Wall Street Journal reported today:
The Indian rupee continued to gain against the U.S. dollar Friday, with the greenback touching 51.36 – its lowest level since April 18. The rupee, Asia’s worst-performing currency in 2011 and for a large part of 2012, has now gained almost 12% from its record low of 57.33 on June 22.
The rupee’s sharp gain has provided the central bank with an opportunity to buy dollars in the currency market, say analysts.
“We estimate that the RBI will need to recoup the entire 65 billion dollars sold since the middle of 2008 to ensure an import cover of nine months by March,” Indranil Sen Gupta, India economist at Bank of America-Merrill Lynch, said in a recent research note. Currently, the bank has seven months’ cover.
For the week ended Sept. 21, the RBI had foreign exchange reserves worth $294 billion as compared to a record $321 billion held in September 2011.