India inches closer to crisis as rupee retreats

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(Reuters) - India may face its worst financial crisis in decades if it fails to stem a slide in the rupee, leaving the Reserve Bank of India (RBI) with a difficult choice over how to make best use of its limited reserves to maintain the confidence of foreign investors.

Unlike most of its Asian peers, India has recently been running large current account and fiscal deficits. That means it must attract sufficient foreign money -- namely U.S. dollars -- to close the gap, and a weaker home currency makes that costlier.

"The Indian currency will be the first casualty of a deterioration in the euro zone crisis," said Rupa Rege Nitsure, chief economist at Bank of Baroda in Mumbai

http://in.reuters.com/article/2011/1...7B904A20111210

[thriftyandboringinohio]

Re: India inches closer to crisis as rupee retreats

When I think of nations with current account deficits, I never think of India.
I've always filed them under BRIC -high growth, low wage, favorable demographics.
A nation that would love a cheap local currency.

[touchring]

Re: India inches closer to crisis as rupee retreats

When I think of nations with current account deficits, I never think of India.
I've always filed them under BRIC -high growth, low wage, favorable demographics.
A nation that would love a cheap local currency.

India has neither oil, coal nor minerals. It is understandable that they have to import almost everything, hence the account deficit.

[GRG55]

Re: India inches closer to crisis as rupee retreats

India has neither oil, coal nor minerals. It is understandable that they have to import almost everything, hence the account deficit.

Your information is incorrect.

India has the fourth largest coal reserves and is the third largest producer of coal in the world, after China and the USA.

According to the CIA factbook India was the 24th largest oil producer in the world in 2010, just ahead of Oman, Colombia and Argentina and just below former OPEC member Indonesia [but India is a net oil importer].

Finally, although I haven't the time to list the statistics for every mineral, India was the fourth largest producer of iron ore in 2010, just behind China, Australia and Brazil. India is quite a large, geographically and geologically diverse country.

India has a long standing and well established internal consumer market, unlike China. Historically that market was supplied almost entirely by Indian producers, a very great number of them State owned. The product quality of most of these producers was too poor to be able to compete in export markets, but when one enjoys a large, heavily protected internal market for decades who cares. To the degree that India imported anything back then, more than likely it came from the Soviet Union, and the product quality of those imports was about as poor as the local goods [Hmm, which would I prefer? A Lada or a Hindustan Motors Ambassador...].

That situation has changed dramatically. The professionals that form the growing middle class in India have developed a taste for better designed, higher quality, more satisfying imported goods...and they have the money to indulge those tastes. That, combined with India's still meager exports [much being textiles and apparel], is contributing to the current account deficit problem.

[Southernguy]

Re: India inches closer to crisis as rupee retreats

The information supplied, with another from Reuters citing a 9% plus inflation rate talk of a broad currency-current account crisis.
If history is any guide, these originate a banking crisis.
All that in a 1 billion people country...
Not good at all for world economy, even if the percapita-GDP of India is ver low.

[photoncounter]

Re: India inches closer to crisis as rupee retreats

Your information is incorrect.

India has the fourth largest coal reserves and is the third largest producer of coal in the world, after China and the USA.

According to the CIA factbook India was the 24th largest oil producer in the world in 2010, just ahead of Oman, Colombia and Argentina and just below former OPEC member Indonesia [but India is a net oil importer].

Finally, although I haven't the time to list the statistics for every mineral, India was the fourth largest producer of iron ore in 2010, just behind China, Australia and Brazil. India is quite a large, geographically and geologically diverse country.

India has a long standing and well established internal consumer market, unlike China. Historically that market was supplied almost entirely by Indian producers, a very great number of them State owned. The product quality of most of these producers was too poor to be able to compete in export markets, but when one enjoys a large, heavily protected internal market for decades who cares. To the degree that India imported anything back then, more than likely it came from the Soviet Union, and the product quality of those imports was about as poor as the local goods [Hmm, which would I prefer? A Lada or a Hindustan Motors Ambassador...].

That situation has changed dramatically. The professionals that form the growing middle class in India have developed a taste for better designed, higher quality, more satisfying imported goods...and they have the money to indulge those tastes. That, combined with India's still meager exports [much being textiles and apparel], is contributing to the current account deficit problem.

+1 ! At the moment CAD problems for India are further worsened by the high oil price -- it's like a cycle -- high oil price -> worsening CAD --> weaker Rupee --> higher oil price. I have a feeling that things are about to get uglier there, specially if US goes in to another recession soon.

[ProdigyofZen]

Re: India inches closer to crisis as rupee retreats

Seems like India didnt follow the golden rule after the 97/98 Asian Financial Crisis.

They should have US dollar reserves = to 1 years worth of trade.

Perhaps time to short the Rupee. A sudden stop could be coming.

[photoncounter]

Re: India inches closer to crisis as rupee retreats

Seems like India didnt follow the golden rule after the 97/98 Asian Financial Crisis.

They should have US dollar reserves = to 1 years worth of trade.

Perhaps time to short the Rupee. A sudden stop could be coming.

I have a bad feeling too, but no conviction. What is the best method to short Rupee ? Any one out there following the developments in India more closely and have more educated inputs ? The economy is robust in the sense that:
- It consumes ~30% of what it produces
- Savings rate is high, I think(lots of cash/black money)
- Most of the people own gold

On the flip side, I feel middle class is leveraging more and more. Buying homes (at variable APR) at prices that does not make sense compared to their income and are now getting squeezed as their monthly mortgage payments and PCE increase relative to income.