Replica of the Empire State Building, Bangalore, India
The Indian economy was cruising at a 9% GDP growth in 2010 when the US was in a recession. It has since plateaued to a more modest 5% over the last year. But tepid economic growth in the US ( less than 2%) and Europe, ensured that India continued to be seen as an investment opportunity - like America was in the late 19th century. The increased money supply caused by Quantitative Easing (QE) at this time, streamlined capital all the way to the Indian shores.
India's woes:
However exciting India might seem, it has its fair share of woes. With an under-developed infrastructure, political volatility and red tape tinged in xenophobia, it effectively makes foreign investment an elaborate and painful process. Any foreign investment was for a quick Return on Investment. Even Indians with cash to invest were looking for opportunities abroad to hedge their portfolios or gain exposure to a more reliable source of return.
US Fed Policy is for the US:
US Fed Policy, ( see Monetary Policy ) while independent of Washington, still works in tandem with Washington and its goal is US economic development (not world economic stability). Following the 1997 Asian Financial Crisis, several discussions were had and several steps taken by various Asian governments to internally strengthen their own financial systems and to insulate themselves from global economic events. With India and China and a lot of Asia demonstrating their resilience as they kept up a healthy GDP all through the US recession, it offered glimpses of hope, but alas hope is drying up rather soon.
Why is the Rupee- Dollar rate at 65.00?
As the US Fed indicates a gradual tapering, investors preparing for a reduction in money supply are pulling their investments from foreign shores and as they bring their money home, they exchange their rupees for dollars. As the supply of rupees increases, its value keeps dropping. Besides, the value of India's foreign debt increases as the dollar strengthens vis-a-vis the rupee, and questions arise about the sufficiency of existing foreign reserves. The Indian Central Bank ( Reserve Bank of India) apparently did not see it coming. Could it do something? Will it be too little and too late. We will wait and see.
What next?
India is well behind any advanced nation, even behind some nations in Asia which were considered contemporaries at some point in the past. But India has a vast pool of young and educated workers who aspire towards upward mobility and are willing to work towards it. There is so much room for development. There are so many people. At this stage, India can only grow. The growth rate may not be as exciting as one would want it to be. Growth may not come from foreign investments. It certainly will not come from any policy changes out of the rather lethargic political system. But India will grow. Future growth will be driven by domestic consumption. As the great Indian middle class gains awareness of western comforts and luxuries and aspires to get there, India will grow. And when growth is driven by domestic demand, growth will be more sustainable.
This is my take for the long term. Obviously, there will be some near term corrections. But if you have a long term outlook and have dollars to spare, this is the time to change it to Rs. 65 and enjoy a slice of the next Indian recovery. Even if it is just a CD ( Fixed Deposit) it will earn you close to 8%!
Resources:
Monetary Policy
Quantitative Easing (QE)
India's woes:
However exciting India might seem, it has its fair share of woes. With an under-developed infrastructure, political volatility and red tape tinged in xenophobia, it effectively makes foreign investment an elaborate and painful process. Any foreign investment was for a quick Return on Investment. Even Indians with cash to invest were looking for opportunities abroad to hedge their portfolios or gain exposure to a more reliable source of return.
US Fed Policy is for the US:
US Fed Policy, ( see Monetary Policy ) while independent of Washington, still works in tandem with Washington and its goal is US economic development (not world economic stability). Following the 1997 Asian Financial Crisis, several discussions were had and several steps taken by various Asian governments to internally strengthen their own financial systems and to insulate themselves from global economic events. With India and China and a lot of Asia demonstrating their resilience as they kept up a healthy GDP all through the US recession, it offered glimpses of hope, but alas hope is drying up rather soon.
Why is the Rupee- Dollar rate at 65.00?
As the US Fed indicates a gradual tapering, investors preparing for a reduction in money supply are pulling their investments from foreign shores and as they bring their money home, they exchange their rupees for dollars. As the supply of rupees increases, its value keeps dropping. Besides, the value of India's foreign debt increases as the dollar strengthens vis-a-vis the rupee, and questions arise about the sufficiency of existing foreign reserves. The Indian Central Bank ( Reserve Bank of India) apparently did not see it coming. Could it do something? Will it be too little and too late. We will wait and see.
What next?
India is well behind any advanced nation, even behind some nations in Asia which were considered contemporaries at some point in the past. But India has a vast pool of young and educated workers who aspire towards upward mobility and are willing to work towards it. There is so much room for development. There are so many people. At this stage, India can only grow. The growth rate may not be as exciting as one would want it to be. Growth may not come from foreign investments. It certainly will not come from any policy changes out of the rather lethargic political system. But India will grow. Future growth will be driven by domestic consumption. As the great Indian middle class gains awareness of western comforts and luxuries and aspires to get there, India will grow. And when growth is driven by domestic demand, growth will be more sustainable.
This is my take for the long term. Obviously, there will be some near term corrections. But if you have a long term outlook and have dollars to spare, this is the time to change it to Rs. 65 and enjoy a slice of the next Indian recovery. Even if it is just a CD ( Fixed Deposit) it will earn you close to 8%!
Resources:
Monetary Policy
Quantitative Easing (QE)
