November 22nd was a historic day in Indian currency market, INR fell to an all time low against the dollar. The rate at which Indian rupee is declining is pretty scary for forex investors, and doesn't present a clear picture of the place which is supposedly insulated from rich world's money market.
It is not like that India doesn't had the problem earlier, balance of payments has been haunting our country from the last 2 decades. There's a sense of panic now in the air, as the investors are reluctant to invest in the country which was called the fastest emerging economic superpower. India's high inflation and current account deficit, financed by capital flows makes it a unique case study in the financial jungle.
Jonathan Anderson of UBS has tagged the rupee a "drama queen". Week INR reflects the scenario of the global currency markets especially the eurozone, which has caused the capital inflows to dry up. But Indian economy has its problems too. The current account deficit is likely to overshoot projections of about 3% of GDP for 2011. Indian exports are slowing faster than Imports of the country. Inflation is contributing to the degrowth of the country. The investments are drying up due to high interest rates, souring inflation and governments stubborn approach to reforming public sector.
The falling rupee reflects India's economic failings. But will it help the Indian cause? A cheaper currency would eventually reduce the external deficit, by boosting exports and limiting imports. But a sharp fall will definitely hurt India, as the country has mainly borrowed in other country's money. Here's a twist as well, lower rupee will raise inflation which is already a pain in the neck.
RBI has started its efforts to ease down the pressure on the currency by easing the rules on foreign lending to India, which will attract some funds for infra sector. They also are now intervening in the currency markets and in the past two weeks have sold dollar heavily from their reserves.But these measures are also affecting Indian market locally, as the monetary conditions are tightening and reducing the liquidity from the market.
The country has $314 billion of reserves, largely thanks to RBI intervening in the past to stop the rupee appreciating too much. But that cushion is not as big as it seems. Foreign debts that must be repaid within a year now equal 48% of India’s reserves.
Indian politician now along with bureaucrats have to make some tough decisions and will have to do things which will appease foreign investors. RBI has got some hard thinking and planning to do if they want the economy to function normally and growing at around 8 or 9%.
It is not like that India doesn't had the problem earlier, balance of payments has been haunting our country from the last 2 decades. There's a sense of panic now in the air, as the investors are reluctant to invest in the country which was called the fastest emerging economic superpower. India's high inflation and current account deficit, financed by capital flows makes it a unique case study in the financial jungle.
Jonathan Anderson of UBS has tagged the rupee a "drama queen". Week INR reflects the scenario of the global currency markets especially the eurozone, which has caused the capital inflows to dry up. But Indian economy has its problems too. The current account deficit is likely to overshoot projections of about 3% of GDP for 2011. Indian exports are slowing faster than Imports of the country. Inflation is contributing to the degrowth of the country. The investments are drying up due to high interest rates, souring inflation and governments stubborn approach to reforming public sector.The falling rupee reflects India's economic failings. But will it help the Indian cause? A cheaper currency would eventually reduce the external deficit, by boosting exports and limiting imports. But a sharp fall will definitely hurt India, as the country has mainly borrowed in other country's money. Here's a twist as well, lower rupee will raise inflation which is already a pain in the neck.
RBI has started its efforts to ease down the pressure on the currency by easing the rules on foreign lending to India, which will attract some funds for infra sector. They also are now intervening in the currency markets and in the past two weeks have sold dollar heavily from their reserves.But these measures are also affecting Indian market locally, as the monetary conditions are tightening and reducing the liquidity from the market.
The country has $314 billion of reserves, largely thanks to RBI intervening in the past to stop the rupee appreciating too much. But that cushion is not as big as it seems. Foreign debts that must be repaid within a year now equal 48% of India’s reserves.
Indian politician now along with bureaucrats have to make some tough decisions and will have to do things which will appease foreign investors. RBI has got some hard thinking and planning to do if they want the economy to function normally and growing at around 8 or 9%.
