|»5 Minute Wrap Up by Equitymaster|
On This Day - 19 NOVEMBER 2011
Rupee is Asia's worst performing currency. Here's why...
In this issue:
Can Europe find a solution to end the current economic crisis?
Will the new economic reforms drive the stock markets?
Are we paying a price for bad democracy?
Get answers for all such complex issues straight from Jawahir Mulraj.
Reasons like the global crisis are common to all currencies and it affects the rupee as well. Investors are wary about the comparatively riskier emerging market currencies. In addition to this are India's internal problems of high inflation rates coupled with high interest rates. This has brought corporate profitability under pressure which in turn has cheesed off foreign investors from investing in the country. This in turn has added pressure on the currency.
The falling rupee has in turn hurt India's import bill. India is a net importer of goods with oil forming the largest portion of total imports. A falling rupee has increased the cost of imports which in turn has increased the current account deficit. This deficit would need to be funded through borrowings or equity investments (Foreign Direct Investments or Foreign Portfolio Investments). This increasing deficit in turn causes worries for the investor which comes back to hurt the value of the currency. Thus it becomes a vicious cycle difficult to get out of.
So what is the way out? The country's central bank, Reserve Bank of India, can step into the foreign exchange markets and boost the rupee. But the Deputy Governor of RBI has clearly stated that the bank has no such intentions. It will intervene only in the event of excessive volatility. And not to control the slide of the rupee that we are seeing in recent times. As India's imports grow, the foreign exchange reserves will soon become inadequate to sustain the growing deficit. This would in turn lead to a higher demand for the US dollar which would lead to a further fall in the value of the rupee. And with the RBI clearly stating that it will not intervene, it looks like rupee will continue its free fall for a while.
The Indian stock markets were one of the biggest losers during the week with the BSE Sensex closing lower by 4.8% over the previous week. Even commodities like crude and gold ended the week in losses. Amongst the other world markets, France was down by 4.8%, while Germany was down by 4.2% during the week. Even UK and US lost gains recorded in the earlier week and were down by 3.3% and 2.9% respectively.
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