India must speed up reforms to ensure stability in financial markets: ADB

Indian economy has been under pressure with the recent depreciation of the rupee and capital outflows

Manila-based Asian Development Bank said the government must hasten fiscal reforms to ensure stability in financial markets, which have seen intense volatility in the last few months. The Indian economy was under pressure owing to, among other things, the recent depreciation of the rupee, ADB said in an update of the Asian Development Outlook 2013.

Changyong Rhee, chief economist of ADB, said, “The recent financial market turbulence is a timely reminder of the need for structural and fiscal reforms, not just to ensure long-term growth, but also to keep financial markets stable in the short run.” The government’s corrective measures were useful in alleviating immediate pressures in the financial and currency markets, ADB said, but required macroeconomic policies should be continued.

The rupee depreciated by nearly 20% against dollar from the start of the year through the end of August, somewhat deeper than the depreciation endured in several other large emerging markets.

External and domestic factors both contributed to the loss in the currency’s value. The investors’ fears of an imminent tapering by the US Federal Reserve of its quantitative easing triggered a sell-off of emerging market assets.

The outsized impact in India was driven not only by its large current account deficit but also by domestic factors, including large budget subsidies, inflation. The perception that the revival of growth needed to win back foreign and domestic investors will be delayed also had bearing on market activity, it said.

The government has taken steps like raising interest rates to support currency and cap on outward capital transfers to address financial market concerns. It also reduced impediments to attract inward for foreign direct investments to bolster growth prospects, ADB said.

The government also indicated its intention to prop up the rupee’s stability by deepening financial markets and easing external financing constraints.

Though these measures are useful to alleviate the immediate pressures in the financial and currency markets, proper macro-economic policies should be continued, ADB said.