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The rapid decline in the Indian currency continues unchecked despite new capital controls. After the Mumbai stock exchange closed on Thursday for Independence Day, the rupee hit a new low on Friday. A US dollar cost 62.01 rupees for a short time.
It doesn't look good with the other values either. The leading index went out of trading with a minus of almost four percent. The price of government bonds fell to a three-month low. The Indian currency has lost more than twelve percent of its value against the US dollar since the beginning of May. The problems are partly homemade. Several attempts by the central bank to put a stop to the dramatic fall in the rupee, however, have already failed miserably.
Deterred foreign investors
Even with recent moves, the Indian government failed to convince investors that it is still able to attract foreign money in order to get a grip on the current account deficit. Foreign investors are constantly criticizing the fact that decisions in the bureaucracy take too long.
In general, the huge bureaucracy is seen as a stumbling block for foreign investment. On the other hand, Indian investors like to invest their money abroad - apparently that seems safer to them. But recent capital controls to get the current account deficit under control are tough.
An outflow of money from India is to be prevented
The Indian central bank announced on Wednesday evening that Indians are only allowed to transfer the equivalent of 56,000 euros per year abroad. In addition, companies can still invest 100 percent of their net worth abroad instead of the previous 400 percent. This put a stop to Indian foreign investment.
The government fears that a further decline in the rupee will widen the foreign trade deficit - because imports would become more expensive in this case. That could slow down investment and further cripple the already weak growth.
Expert: India is losing control
The Indian economy is currently growing at five percent, as little as it has been in a decade. The hole in the current account - which includes foreign trade as well as capital flows and services - now measures 4.8 percent of economic output and is therefore bigger than ever. Since the end of May, foreign investors have pulled the bottom line of $ 11.6 billion from Indian securities.
"India is losing control of the rupee and the weakness is spreading to the stock markets," said UBS strategist Manik Narain. "A spiral could develop if the weak currency drives equity investors out of the country and then further devalues the rupee."
"It looks a bit like a panic," said Jonathan Schiessl, fund manager at Ashburton Investments, on the government's recent moves. “That puts a strain on investor confidence. If nothing changes, we will likely reduce our holdings in Indian securities. "
The problem with the gold
In addition to foreign exchange exports and foreign investments, gold imports were also restricted. For example, the government banned the import of gold coins and obliged gold buyers to pay the price in cash in advance.
The government wants to curb the huge demand for gold, because it also worsens the foreign trade deficit. The Indian tradition of giving away gold at weddings and other celebrations has made the country the world's largest gold importer.
Not the first attempt
To support the rupee, the central bank had already raised interest rates on short-term loans sharply in recent weeks and put a stop to Indian foreign investments. To the chagrin of politicians and the central bank, inflation recently climbed above the Reserve Bank of India's target range. “These are obviously extreme measures, but unusual times require unusual steps,” commented economist Sujan Hajra from broker Anand Rathi.
FED has its share in the development
The currency weakness can also be explained by the extremely loose monetary policy of the US central bank FED. Over the past few years, this has resulted in a lot of capital flowing into emerging countries and allowing the currencies there to strengthen. However, recent speculation about tightening US monetary policy then triggered a reversal in capital flow. The FED could curb the billion dollar purchase of securities to support the economy later this year. Experts expect the central bankers to take action when they make their next interest rate decision in September.
The volatility index, which maps options and is rated by some investors as a fear index, provides information on the mood in the market. It soared by 26.4 percent, the largest increase since mid-2009. Experts have been critical of the government's actions.
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