Cracks begin to appear in India
WHILE the monsoon season may soon be over, there seems to be no respite in the negative sentiment currently surrounding the Indian economy.
Whether it’s the drought in capital inflows or the rupee, which continues to hit multi-year lows, investors are paying greater attention to not only the opportunities but also the threats posed by the South Asian giant’s economy.
Investment Solutions chief economist Chris Hart said: “The problem with India is that it belongs to that group of countries which suffer from both a fiscal and current account deficit.
“The markets are starting to realise the unsustainable nature of that situation, which is why the rupee has come under some pressure.”
Since the announcement by the US Federal Reserve in June that it intended to withdraw liquidity from the system and end its stimulus programme, investors have steadily been reducing their exposure to emerging markets, triggering a rush back to the developed world in anticipation of the higher bond yields.
As a way of enticing investors to hold on to the rupee, Indian policymakers quickly introduced measures such as increasing the marginal standing facility rate by 2% to 10.25% in a bid to stem capital flight.
However, in an aboutturn last week, India bought back longdated government bonds worth 80 billion rupees (R13-billion) through an open market operation.
“It’s all been very confusing,” said Mark Williams, chief Asian economist at Capital Economics in London.
“They seemed to want to send a signal … that they were tightening monetary policy only to have them end up doing what seemed to have an opposite effect.”
An official at the SA High Commission in Delhi said most people thought that India was a market that would give exposure to over a billion consumers.
“In reality, there’s only 250 million to 300 million people who fall within what one would call the middle class,” said a senior diplomat, who preferred not to be named.
“While this remains a country with great opportunity … companies must be prepared to have local partners who understand the local environment, if they’re to succeed.”