Since May 1st, the Indian currency Rupee fell by 19% since May 1st. Why? The Rupee’s decline was mostly due to outflows prompted by global investor’s expectations that the U.S. Federal Reserve will soon begin to wind down its monetary stimulus program (tapering). But India is also suffering from a slowing economy and a current account deficit.
The Reserve Bank of India’s new governor, Raghuram Rajan, has made steps that the bank will take to face one of the biggest financial and economic challenges in years, including outflows that pushed the rupee to a record low against the U.S. dollar last month. The rupee’s current offshore trade is at 65.24 to a dollar.
One of the steps in the plan includes how the central bank will not let foreigners and Indian expatriates (somebody who is temporarily in the country) who control Indian based companies to buy additional shares in those companies directly through brokers in order to increase capital inflows and prevent capital outflows. Under this new rule, the shares could also be paid for with dividends.
This is very important that India is taking steps to deal with its economic instability. Since 2007 and 2008, both India and China have been carrying most of the global economic growth. If both economies start to “tank”, which country is going to carry most of the growth? However, I do expect the demand for gold in India to will go up with high inflation because if you look back at the United States in 2008, the demand for gold went up dramatically. Why? There was high inflation.
By: Suhail Zalia