I have been watching, and mercilessly transferring INR back home (we are all Indians here) over the last six months. Every time the rupee scaled new highs, I thought I was out-smarting everyone with an awesome bargain, only to watch the rupee sink to ever lower lows month after month. So what's the deal with India?
Part of it has to do with the whole Fed Taper talk. With cheap money fleeing emerging markets, EM currencies are likely to be hammered. Just look at this chart for a comparison of the Indian Rupee, South African Rand and the Brazilian Real. But the Fed taper is just a manifestation of a stronger US going forward. For all of its problems and poor policies, the US is actually head and shoulders ahead of EM. Why?
First of all, there are real signs of improvement in the US economy: falling unemployment, rising payrolls, rising house prices, resurgent manufacturing, energy independence, and a consumer that will consume come what may (unlike the "savers" of Japan from the lost decade) all point to good things for the US in the coming cycle - which makes it a better relative value trade for many investors.
Second, there's been a serious slowdown of EM consumption. GDP growth in China and India has been lagging inflation - which essentially means that wages are not keeping pace with rising prices. This quickly turns into a vicious cycle - as weaker currencies means imports get that much more expensive, leading to further higher inflation.
On top of that, in India's case at least, there is little confidence in corporate governance and the political leaders of the country have given us no reason to believe that they will do what is right for the country. They have consistently acted in self-interest, and corruption scandals these days are just as commonplace in India as are petty crimes around India gate!
So how can all this be fixed? That can be the topic of a future post...
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