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Slaughter & Rees Report - Hail Mary Passes, in Indiana and India Alike

September 2, 2013

Welcome back. We hope that your August holidays brought rest and good cheer.

It is now September, which on many U.S. college campuses brings (American) football. One of your correspondents attended Notre Dame in Indiana, whose storied football history has included the occasional “Hail Mary” pass—that is, a long pass thrown by the quarterback in desperation when a team is losing, when the defense is prepared, and when time is short. (Yes, I know, Notre Dame sadly needed many more successful Hail Mary passes on January 7 of this year.)

Not to spoil your August holiday glow, but September this year also brings turmoil in global capital markets. In the past few weeks the currencies and stock markets have fallen dramatically for a number of emerging markets, such as Brazil, Indonesia, and Turkey.

Perhaps most dramatic and worrisome has been the turmoil in India. Over the past four months the Indian rupee has depreciated by about 20 percent against the U.S. dollar—and at an accelerating rate. Last Wednesday it fell by nearly 4 percent, the sharpest one-day sell-off in nearly 20 years. India’s 30-company Sensex stock index is down about 5 percent this month; in the past few months broader mid-cap and small-cap indexes in India are down about 25 percent.

Why has this financial turmoil befallen India, one of the world’s fastest-growth economies over the past generation? One big reason is much slower growth. India’s 10.1 percent growth in gross domestic product (GDP) in 2007 is a distant memory. Last Friday India’s statistical office announced that GDP increased just 4.4 percent year-over-year in the April-June quarter, below expectations and the third consecutive quarter of growth below 5 percent. A major cause of slower growth, in turn, has been stalled policy reforms. Years of introducing and expanding market forces into the Indian economy—think its globally engaged, high-productivity IT industry—has virtually halted in retail trade and other important sectors.

The other big reason seems to be Ben Bernanke. In recent months, the Federal Reserve Chairman has openly discussed tapering the Fed’s current $85-billion-per-month expansion of its balance sheet. In anticipation of the higher U.S. interest rates this tightening might bring, investors worldwide seem to be shifting demand away from emerging markets.

No one knows, of course, what fraction of India’s woes link to Ben Bernanke’s words. This is the reality the world faces this fall:  quantitative easing by the world’s central banks remains a massive improvisation. Or, in the words of football fan Raghuram Rajan, who starts Wednesday as the new head of the Reserve Bank of India, QE “is a Hail Mary pass. We don’t know where it’s going to end up. We don’t know how to exit from it and we don’t know whether the process of exit … will cause even more turmoil at that point.”  Full disclosure: one of us is a friend and co-author of Raghu. That said, for the good of India and the world, we all should wish that whatever Hail Mary passes Raghu launches bring many touchdowns.

Articles © 2013 Matthew Slaughter and Matthew Rees. All rights reserved.
Publication © 2013 Trustees of Dartmouth College. All rights reserved.

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