India is now walking on the same lane that once brought in the Asian financial crisis.
In July 1997 the South East Asian stock markets, especially South Korea, Malaysia, Thailand and Philippines, which till then were on rampage, not only came to a screeching halt, but also entered into a prolonged phase of nightmare – better known as the Asian financial crisis. Foreign Institutional Investors (FIIs), which poured in a whopping $19.1 billion into the countries’ markets in 1996 and drove these markets to record highs, flew away overnight ruining the countries’ stock markets and economic stability. So much so that while the Thai stock market lost 75% of its value, the PSE Composite in Philippines fell by around 66%.
The scenario was more or less the same in January 2008, when the Indian benchmark index Sensex after scaling a historic high of 21,206 on January 10, dwindled down to 15,322 by January 22. This time the same FIIs, who from January 1 till January 16 had infused Rs 30.59 billion into the Indian stock markets, pulled out a nerve-wracking Rs 44.65 billion in just two days, January 17 and 18. And now, the Indian stock market has again become the purple cow for the FII group. As per the Securities and Exchange Board of India (SEBI), net investments made by FIIs in the country’s equity markets has already gone past a mind-boggling Rs 1 trillion ($22 billion), pushing the market to the 21,000 level. What is most noticeable here is the way the FIIs have got hold of the nerve of the Indian market since the beginning of September 2010. Since then, while they have infused $17.3 billion, the Sensex has soared 16.5%. While industry mouthpieces like C. B. Bhave, Chairman SEBI, might not be overly worried about the situation, what cannot be ignored is the fact that while in 1996-97, India was fairly insulated from the global economy and even FII hot money vagaries, the situation is quite different currently. While the reasons for the sudden fall in the stock markets might be quite clear to industry players, a majority of global investors would fail to undertake a deeper analysis and could arbitrarily decrease the sovereign ratings for the nation – resulting in much collateral damage, international loan interest rates inclusive.
In fact, due to the increasing inflow of external capital and surging demand for the rupee, value of the domestic currency has risen sharply in terms of real effective exchange rate hurting the country’s exports. As for records, the rupee, which was trading at 47.08 against the greenback on August 31, surged almost 6% to 44.26 (as on November 8) on the back of heavy buying by the FIIs. Moreover, the strengthening of the rupee has allowed imports to surge 35.7% y-o-y in the second quarter as against a 21.7% y-o-y decline last year, pushing India’s trade deficit to rise by 33.5% to $34.2 billion in Q2FY’10 from $25.6 billion in the same quarter last fiscal. Though the exporters are now lobbying with the central bank to put a check on the rate hikes to somehow protect their competitiveness (a drop in the interest rate can put a pause to the capital inflow by reducing the difference between the prevailing near zero interest rates of the developed countries and the high interest rate of India), the Reserve Bank itself is in a helpless situation in its fight against inflation.
The RBI is currently increasing its base rates by around 25 to 50 basis points in almost every fiscal policy meeting to absorb the excess liquidity that was injected by the government to the economy earlier to lift the country’s GDP growth rate to over 8%. But in the process, it is drawing a higher inflow of foreign funds to the country’s economic system. As of now, the spread between India’s 10-year bonds and the US 10-year treasuries is standing at a record high of 5.7%, making India a hot destination for the overseas investors. In fact, considering the fact that RBI is still to reach to a peak in terms of interest rate hikes, India even stands as a better destination for FIIs as compared to other developing Asian markets where inflation is well under control and hence chances of rate hike is lesser than India.
On the other hand, such a rush of FIIs to invest in the Indian market has created another hassle for the apex bank. As Bodhi Ganguli, Economist, Moody’s Economy points out, “All foreign-currency purchases by the RBI will have to be fully sterilised now to prevent from adding excess liquidity to the domestic economy.” But then, considering that India’s foreign currency reserve has grown over 5% from $256 billion to $269 billion between August 27 and October 29, the job in the hands of RBI does not seem to be an easy one. And if the country’s Broad Money (M3) is an indicator to be considered, then RBI is certainly struggling on this front as India’s M3 has grown by nearly 4.1% during that period to Rs 60.68 trillion (October 22) from Rs 58.30 trillion (August 27).
However, for the time being, the country can be in solace as the Planning Commission is still confident that these inflows can be absorbed by the country’s huge current account deficit. But, for a long term benefit of the country’s economy, today, Indian regulators must let go of the short term market benefits and put a check on the hot money flow. Else, sooner or later, India will end up being the epicentre of yet another Asian financial crisis.
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In July 1997 the South East Asian stock markets, especially South Korea, Malaysia, Thailand and Philippines, which till then were on rampage, not only came to a screeching halt, but also entered into a prolonged phase of nightmare – better known as the Asian financial crisis. Foreign Institutional Investors (FIIs), which poured in a whopping $19.1 billion into the countries’ markets in 1996 and drove these markets to record highs, flew away overnight ruining the countries’ stock markets and economic stability. So much so that while the Thai stock market lost 75% of its value, the PSE Composite in Philippines fell by around 66%.
The scenario was more or less the same in January 2008, when the Indian benchmark index Sensex after scaling a historic high of 21,206 on January 10, dwindled down to 15,322 by January 22. This time the same FIIs, who from January 1 till January 16 had infused Rs 30.59 billion into the Indian stock markets, pulled out a nerve-wracking Rs 44.65 billion in just two days, January 17 and 18. And now, the Indian stock market has again become the purple cow for the FII group. As per the Securities and Exchange Board of India (SEBI), net investments made by FIIs in the country’s equity markets has already gone past a mind-boggling Rs 1 trillion ($22 billion), pushing the market to the 21,000 level. What is most noticeable here is the way the FIIs have got hold of the nerve of the Indian market since the beginning of September 2010. Since then, while they have infused $17.3 billion, the Sensex has soared 16.5%. While industry mouthpieces like C. B. Bhave, Chairman SEBI, might not be overly worried about the situation, what cannot be ignored is the fact that while in 1996-97, India was fairly insulated from the global economy and even FII hot money vagaries, the situation is quite different currently. While the reasons for the sudden fall in the stock markets might be quite clear to industry players, a majority of global investors would fail to undertake a deeper analysis and could arbitrarily decrease the sovereign ratings for the nation – resulting in much collateral damage, international loan interest rates inclusive.
In fact, due to the increasing inflow of external capital and surging demand for the rupee, value of the domestic currency has risen sharply in terms of real effective exchange rate hurting the country’s exports. As for records, the rupee, which was trading at 47.08 against the greenback on August 31, surged almost 6% to 44.26 (as on November 8) on the back of heavy buying by the FIIs. Moreover, the strengthening of the rupee has allowed imports to surge 35.7% y-o-y in the second quarter as against a 21.7% y-o-y decline last year, pushing India’s trade deficit to rise by 33.5% to $34.2 billion in Q2FY’10 from $25.6 billion in the same quarter last fiscal. Though the exporters are now lobbying with the central bank to put a check on the rate hikes to somehow protect their competitiveness (a drop in the interest rate can put a pause to the capital inflow by reducing the difference between the prevailing near zero interest rates of the developed countries and the high interest rate of India), the Reserve Bank itself is in a helpless situation in its fight against inflation.
The RBI is currently increasing its base rates by around 25 to 50 basis points in almost every fiscal policy meeting to absorb the excess liquidity that was injected by the government to the economy earlier to lift the country’s GDP growth rate to over 8%. But in the process, it is drawing a higher inflow of foreign funds to the country’s economic system. As of now, the spread between India’s 10-year bonds and the US 10-year treasuries is standing at a record high of 5.7%, making India a hot destination for the overseas investors. In fact, considering the fact that RBI is still to reach to a peak in terms of interest rate hikes, India even stands as a better destination for FIIs as compared to other developing Asian markets where inflation is well under control and hence chances of rate hike is lesser than India.
On the other hand, such a rush of FIIs to invest in the Indian market has created another hassle for the apex bank. As Bodhi Ganguli, Economist, Moody’s Economy points out, “All foreign-currency purchases by the RBI will have to be fully sterilised now to prevent from adding excess liquidity to the domestic economy.” But then, considering that India’s foreign currency reserve has grown over 5% from $256 billion to $269 billion between August 27 and October 29, the job in the hands of RBI does not seem to be an easy one. And if the country’s Broad Money (M3) is an indicator to be considered, then RBI is certainly struggling on this front as India’s M3 has grown by nearly 4.1% during that period to Rs 60.68 trillion (October 22) from Rs 58.30 trillion (August 27).
However, for the time being, the country can be in solace as the Planning Commission is still confident that these inflows can be absorbed by the country’s huge current account deficit. But, for a long term benefit of the country’s economy, today, Indian regulators must let go of the short term market benefits and put a check on the hot money flow. Else, sooner or later, India will end up being the epicentre of yet another Asian financial crisis.
For More IIPM Info, Visit below mentioned IIPM articles.
GIDF Club of IIPM Lucknow Organizes Blood Donation Camp
Mobile application for Nokia phones is launched by The Times of India
Watching porn video is not a crime
Why your wife or girlfriend seems "off sex" of late?
A Healthcare Issue: Private hospitals' efficiency questioned
Katrina Kaif: A British Indian Actress Born on July 16, 1984
Domestic violence has been a silent relationship killer since time immemorial.
IIPM: Indian Institute of Planning and Management
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