India zigs while Indonesia zags
Indonesia's Vice-President characterised higher interest rates and a weakened currency as the "new normal". Boediono, who uses only one name, said Indonesia would face a tougher international financial environment in coming months and should give greater emphasis to a stable currency, stable prices and a stable trade balance, and not just pursue economic growth.
"We have been addicted, so to speak, with an easy money environment for four years," said Boediono, the main architect of Indonesian economic policy since the Asian financial crisis in 1997 and 1998.
"We know that we have to make some adjustments, and maybe by next year, we have to really, fully adjust to a new normal, so to speak, where easy money is no longer" available.
But in Mumbai, the new governor of the Reserve Bank suggested India faced less of an international threat after the US Federal Reserve decided last week to continue its economic stimulus, at least temporarily. The governor, Raghuram Rajan, lowered a key interest rate by 75 basis points.
India had pushed interest rates up sharply to make investments there more attractive and slow the fall of the rupee. Reversing part of that increase now "will provide a boost to growth", Mr Rajan said.
In monetary terms, India is zigging while Indonesia is zagging, despite the many common challenges that have pummelled their currencies and markets in recent weeks. Both must balance a need to preserve economic growth for large, heavily poor populations, while at the same time preventing a build-up of inflation that might discourage longer-term investments - a balancing act that has bedevilled policymakers in the US and other affluent countries over the years.
India, with a population of 1.2 billion, and Indonesia, with 250 million, are struggling to modernise their infrastructure, while stuck with complex land ownership laws that make it hard to redevelop cities rapidly. Both are wrestling with costly fuel subsidies that are driving up government budget deficits.
Both have sizeable current-account deficits compared to their output, together with nearly double-digit inflation in consumer prices.
Perhaps most important, both face national elections next year that limit their ability to make politically unappetising economic decisions: India will elect a new parliament by the end of May, while Indonesia will elect a new legislature in April and a new president in July.
The different policies outlined on Friday reflect differences in the seriousness of their predicaments, with India appearing to be in considerably worse shape.
While Indonesia's ports and highways still have shortcomings, they are good enough that the country has emerged as one destination for the many firms shifting operations away from China in response to surging blue-collar wages there. India's bureaucracy is stifling, and the country's roads are so bad that vehicles slow to walking speeds.
Frequently Asked Questions about this Article…
India and Indonesia have taken opposite monetary approaches: Indonesia's leadership has signaled acceptance of higher interest rates and a weaker currency as the "new normal," prioritising currency, price and trade-balance stability over growth. By contrast, India's new central bank governor cut a key interest rate by 75 basis points after the US Fed kept stimulus in place, reversing part of previous rate hikes meant to attract capital and support the rupee.
Falling currencies and shifting interest rates create both risk and opportunity: a weaker currency can reduce returns for foreign investors and increase inflationary pressures, while higher local rates can boost fixed-income yields but may slow economic growth. Investors should weigh currency risk, local bond yields and how policy changes might affect corporate profits and stock markets.
The article highlights several risks: nearly double‑digit consumer inflation, sizeable current‑account deficits relative to output, costly fuel subsidies that widen government budget deficits, and the political constraints of upcoming national elections. These factors can influence interest rates, currency stability and investment returns.
Both countries face national elections next year that limit policymakers' ability to make politically difficult economic moves. India will elect a new parliament by the end of May, and Indonesia has legislative elections in April and a presidential vote in July — events that can increase policy uncertainty and market volatility for investors.
According to the article, Indonesia's ports and highways—while not perfect—are good enough that the country has emerged as a destination for firms relocating from China because of rising Chinese labour costs. By contrast, India's stifling bureaucracy and very poor roads are cited as constraints on rapid redeployment of industry.
Indonesia's view of a "new normal" suggests investors should expect an environment with higher interest rates and a softer currency for some time. That environment can mean stronger yields on local fixed‑income instruments but greater currency volatility and possible headwinds for growth‑sensitive assets.
India's central bank governor cut a key rate by 75 basis points after the US Fed decided to continue stimulus, and because India had earlier raised rates sharply to attract capital and slow the rupee's decline. The partial reversal is intended to provide a boost to growth, which may help corporate earnings and stock markets, though it could also affect currency and inflation dynamics.
Both countries struggle to modernise infrastructure and face complex land‑ownership laws that make rapid urban redevelopment difficult. These structural constraints matter for long‑term investors because they affect logistics, costs, productivity and the speed at which companies can expand or modernise operations—areas where the article suggests Indonesia currently has an edge over India.
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