NEW YORK ( TheStreet) -- Since the Federal Reserve apparently intends to rein in bond purchases, investors have pulled funds out of emerging markets due to higher U.S. interest rates and a stronger dollar.
The lack of easy credit and fewer dollars circulating through financial markets have caused investors to pull funds out of countries like India. As funds were pulled, the Indian rupee vastly depreciated against the dollar, leading to a massive current account deficit.
It's a classic balance of payments crisis, where speculators attack a weak currency and quickly devalue it.
The Reserve Bank of India has raised short-term interest rates to try to fend off short sellers. That has had negative effects, though, as struggling corporations have seen their borrowing costs increase.(USO) over WisdomTree Indian Rupee (ICN). The pair represents oil priced in rupees. As the rupee has fallen, commodities have inflated in price, weighing heavily on the Indian consumer. With the International Monetary Fund stating that emerging markets need to produce domestic demand for growth as the global economy gradually recovers, high oil prices will continue to weigh on Indian consumers' spending.
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