No End in Sight for Sell-off in Indian Rupee
Central Bank Policy
At this stage, India's central bank will be forced to continue implementing new policy measures in order to avoid an all-out economic crisis. But widening deficits in India's budget and current account will likely push the rupee to new record lows before the end of the year. The Reserve Bank of India has defined its goals to contain its trade imbalances to $70 billion by the first quarter of 2014. The fiscal gap will be difficult to control, however, as plans to expand food programs (by spending 18.3 trillion in annual subsidies) create new obstacles in other areas of the economy.
All of these factors -- and the Reserve Bank of India's inability to sufficiently address key areas of concern -- suggest that this year's rout in India's stock and currency markets has yet to run its course. India remains particularly vulnerable to negative developments with respect to potential conflicts in Syria, and any external events that put upward pressure on oil and commodities prices. Credit-default swaps that insure debt incurred by the State Bank of India have risen by 111 basis points this month. This negative indicator of market sentiment suggests that India will continue to experience difficulties in attracting foreign investment -- an absolute necessity if the country hopes to rebalance its trade deficits. Until progress is made in these areas, expect the rupee to continue its slide and hit new record lows before the end of the year.
At the time of publication the author held no positions in any of the stocks mentioned.This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
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