India better poised than other countries, says RBI's Rajan. How far will this optimism take us?

The BSE Sensex witnessed its largest intraday fall in seven years and the rupee tumbled to fresh two-year lows on Monday amid a massive sell-off in the global markets on China's woes.

Markets erased 5.6% in intraday trade, down 1,153 points, before slightly recovering to 4.94% below the red line, at 19,665.24, at 1335 hours.

Amid this bloodbath, Reserve Bank of India's governor, Raghuram Rajan stepped in to ensure markets, saying that India was much better off than other countries. He said: “I wish to assure markets, macroeconomic factors are under control.”

The rupee breached the 66-level for the first time since September 2013, and inched closer to 67 to a dollar in the day. This was even after a weak dollar index against the basket of emerging market currencies.

Rajan indicated that the RBI will not hesitate to intervene to contain the rupee's fall.

While central banks of other emerging economies are rumoured to have intervened to arrest the fall of their respective currencies, RBI had, so far, stayed on the sidelines. However, looking at Monday's fall, Rajan indicated that the RBI may intervene to arrest the rupee's weakness. He said that RBI was not apprehensive about using India's comfortable $380 billion Forex reserves when needed.

However, he maintained that the Indian currency was still in a better position, compared to other currencies.

Yes, Rajan is right about that. Since the Yuan devaluation, while the rupee went into a tailspin to a fresh two-year low near 67-level, South Africa's rand is struggling at 14-year lows. The Turkish Iira, a fall exacerbated by domestic political developments, is languishing at a record low, and the Malaysian ringgit is at a 17-year low.

But is this reason enough not to be worried?

India's macroeconomic indicators tell a different story

-- The fall in the BSE Sensex was the biggest since October 24, 2008 – seven years. It was also the fourth biggest ever for the benchmark BSE index.

-- This is also a new low for the rupee. While a cheaper rupee will give a boost to India's staggering exports, it will also bump up our import bill, widening the trade deficit, which is already at $45 billion in the first four months of FY16. 

-- A cheaper rupee will also prompt foreign investors to pull out of the country to find more lucrative economies. Overseas investors have pulled out nearly Rs 2,000 crore from the Indian stock markets since the beginning of the month amid concerns over Chinese economy coupled with sharp erosion in the value of rupee. This was in contrast to a net inflow of Rs 5,319 crore by Foreign Portfolio Investors (FPIs) in equities last month.

-- Couple that with policy logjam in the country – the monsoon session of the parliament was a complete washout, with the fate of the Goods & Services Bill and the crucial Land Acquisition bill still in question. Uncertainty over key policies will further erode investor sentiment, and may have an adverse impact on Prime Minister Narendra Modi's flagship 'Make in India' campaign.

-- Inflation fell to record lows in July, with wholesale inflation at -4.05% in the month and consumer inflation at 3.78%. Petrol prices have also been consistently cut, in line with falling international fuel prices and low inflation rates. But this was in July. The government has been calling for a rate cut. Inflation numbers, however, are expected to bump up again, in the wake of high onion prices -- onion prices have touched Rs 80 in Delhi, Rs 55 in Mumbai, with wholesale prices in Asia's largest wholesale market, Lasalgaon, Nashik, crossing Rs 57 a kg on the back of low production and staggering supply. Add to this, Indian Meteorological Department's estimate of a 10% monsoon deficit, which is also expected to affect other crop output, putting the matter of a rate cut in question again.