8/17/2017 Crucibles of Indian love or a state of collapse!

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28th August 2013 Crucibles of Indian love or a state of collapse!

Seems like for inflation in the context of Nepal the saying more is less applies strongly. Inflation by no means was less
bountiful for Nepals economy. This time we are to be endowed with some more, possibly slightly more than what we
can handle. Circumstances in India and international currency market which are far beyond Nepals control are leading
our economy into a state of chaos and irrevocable damage. It is even speculated that the onset of another Asian crisis
to the scale of 1997 is possible. Therefore, its time we gear for some turbulent times ahead.

Though this is not the first time that our currency and economy has been hard-hit by some global, regional and national
economy. However the severity is likely to be more this time around since the origination of this problem is
predominantly centered in India along with resulting effect of strengthening of Dollar, Euro crisis, rise in oil price and
more as part of a global phenomenon. The crux of the problem is that the current account balance and currency
reserve of Indian currency is rapidly depleting with increasing demand for dollar leading to a shortage of dollar reserve
and rising pressure of paying to foreign importers and investors alike in dollar. It means that Indias sources of dollar (or
other currency reserve) are falling short of the demand for it.

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The immediate impact of these recent occurrences is that the price of imports ranging from food, utility to electronics
and machinery will rise unbearably. In simple estimates it is said that it is likely that food and edible item costs rise by
15%, electronics and machinery by 16-25%, foreign study by 25%. In short, it will lead to a big hole in general
consumers pockets. In the macro level, the scenario looks even gruesome. The current account rift will broaden even
wider, place extreme depletion of the currency balance; take the already meager rate of GDP rates to weaken. For the
last few decades, pegging Nepalese currency with well performing India has proved to be a safe resort for Nepal.
Despite pressures, Nepal has been able to strike a balance and benefit from lower valuation of fixed currency regime at
Nrs 1.6 compared to what it should be as suggested by the Real Exchange Rate of Nepal (REER). Now, since the
Indian currency is nose-diving for the last few weeks it is threatening to destroy the balance and bring a multifaceted
crisis in Nepal. It is helpless position for Nepal, as it is for any pegged currency where the only option is to wait and
wish that the Indian measures to control the rapid depreciation of Indian currency works.

Posted 28th August 2013 by raghav pokharel

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