Watch Your Neighbors – Uday Kotak Warns of Risks as Euro to US Dollar Parity Fuels Worries in India

Sri Lanka’s crisis, driven by the island nation’s high debt levels, soaring inflation and food shortages, has become something of a cautionary tale for a number of indebted countries that may be just as vulnerable. On July 12, veteran banker Uday Kotak flagged currency risks, particularly for emerging markets, with the euro now at par with the safe-haven dollar, hitting a new 20-year low.

In a tweet, the CEO of Kotak Mahindra Bank said: “€ at 1:1 against $. Gold, Crypto, Pound and Yen crashing. US currency supremacy. Market countries Emerging markets need to be vigilant. Some of the biggest risks come from currencies and can destroy some countries. Look at your neighbors Lanka and Pakistan.

The greenback’s gains, as measured by the dollar index, come amid further tightening of central bank stance, resurgent COVID-19 outbreaks in China and energy shortages in Europe that frighten investors amid the ongoing war between Russia and Ukraine.

Situation of the Indian rupee and the external debt

India’s trade deficit widened to $25.63 billion in June, pushed by oil and coal imports, according to data from the Ministry of Commerce and Industry. For the first quarter of the current fiscal year, the trade deficit widened to $70.25 billion due to high imports.

On the external debt front, India has to repay about $267 billion out of a total of $621 billion in less than a year. The $267 billion repayment is equivalent to about 44% of India’s current foreign exchange reserves.

The Center tried to soothe nerves over India’s huge external debt of $621 billion, saying its share is just $130.8 billion, or 21% of total liabilities, and of which only $7.7 billion needs to be repaid in less than a year, according to an ET report. Nevertheless, some Indian states’ debt is at unhealthy levels and the RBI and economists have faltered time and time again.

Overall, India’s gross government debt stands at 86.9% of GDP, which is high but comparatively better than developed economies such as the United States, France, Canada, the Kingdom United and others. Brazil, an emerging market economy, has a gross public debt of 91.9%.

Pakistan’s total public debt stood at $215 billion at the end of March 2022, according to the country’s 2021-22 economic survey.

What are the experts saying?

For its part, India has taken steps to introduce an additional means of invoicing, payment and settlement of exports and imports in Indian rupees. Politics could do a lot to push the rupee mechanism.
High inflation in India is “not that problematic”, said Vinay Khattar, executive vice president and head of research at Edelweiss Broking, while acknowledging that significant pressure is building up globally due to high inflation in the United States.

“As for India, our own history is not that problematic, although our inflation is quite high. But some of that imported inflation is largely due to fuel prices, which are a big driver of Russian-Ukrainian problem,” Khattar told CNBC-TV18.

Vinod Nair, Head of Research at Geojit Financial Services, said: “Fears of rising interest rates are again front and center in global markets…Inflationary pressure as well as strong data on the jobs in the United States would keep the Fed on track for aggressive rate hikes. Demand concerns amid a rebound in coronavirus cases in China have forced crude oil to trade lower.”

—With agency contributions

(Edited by : Shoma Bhattacharjee)

First post: STI