Global Macro: India Tries to Fend Off Currency Speculators

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.

The RBI's latest effort has been to call for joint action among other members of the G20. India's mere presence at the summit this week signals that it may be trying to state its case to foreign governments, coordinating with them to buy rupees and help stabilize the currency.

The first chart below is of United States Oil ( 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.

Similarly, the violence in Syria has magnified the effects of higher oil prices. Although the price of oil appears to have reached intermediate-term overbought levels, increased tension in the North African region or further loss of confidence in the rupee could greatly affect this pair's price level.

The next chart is of PowerShares India ( PIN) over Vanguard Total World Stock Index ETF ( VT). Indian equities have been sold off as investor sentiment in the country has deteriorated alongside the rupee.

The pair has gained some strength recently as world leaders have rallied together in an effort to stabilize emerging-market currencies and bring strength back to those regions.

The only issue ahead lies in how investors react to emerging markets as central bank liquidity in developed countries dries up.

The mere rumors of U.S. tightening or ineffective Japanese policies have led to massive speculative selloffs in countries such as Brazil, Turkey, and India; thus far, however, coordinated policy effort -- perhaps achieved at the G20 -- could give short sellers a break for a few months. That would be bullish, or at least neutral for emerging economies that have seen weakness.

At the time of publication the author had no position in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Andrew Sachais' focus is on analyzing markets with global macro-based strategies. Sachais is a chief investment strategist and portfolio manager at the start-up fund, Satch Kapital Investments. The fund uses ETF's traded on the U.S. stock market to gain exposure to both domestic and foreign assets. His strategy takes into consideration global equity, commodity, currency and debt markets. Sachais is a graduate of Georgetown University, where he earned a degree in Economics.

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