Anyone planning a winter sunshine holiday to India would be well-advised to book now after the Rupee fell to an all-time low against the dollar of Rs64.4. The flight from emerging markets has cranked up since the expectation that the Federal Reserve will soon begin tapering its purchases of government bond hardened into certainty. India has found that its position is particularly vulnerable because of a year of anaemic-looking economic growth and a burgeoning current account deficit. The Bank of India can probably hold the line with asset purchases to prop up the rupee, but like many emerging markets before have discovered, once the initial competitive advantage of cheap labour has been eroded, the next stage of development requires far-reaching structural changes.
It is possible to be too hard on the country as the disappointment over its slowing economic growth says as much about the vagaries of trying to predict the future as it does about India's slowdown. For example, in 2011 the International Monetary Fund (IMF) forecast that the Indian economy would grow by cumulative 37 per cent between 2013 and 2016. The Fund's latest updated prediction this year is that India's GDP will grow by 28 percent over the same period. Obviously, that is disappointing for investors who were betting on greater levels of growth.
However, according to the IMF, it isn't foreign investors who have the capacity to cause the greatest instability in the country's markets, but residents suddenly sending money abroad. The Fund found that the inflow and outflow of foreign investment tended to have a minimal statistical impact on any subsequent instability affecting interest and foreign currency rates. After all, despite a decade of reforms, significant investment controls are still in place. What has happened is that the long years of economic boom have boosted the domestic pool of savers to a level that has now reached a critical mass, and it is this increasingly restive group, which is currently buying gold and dollars in large amounts, that the government must placate if it is to avoid a fully-fledged currency crisis.
