Tuesday, October 26, 2010

Currency wars reach the Indian shores

A few days ago, I quoted Martin Wolf, who wrote in the Financial Times that:
To put it crudely, the US wants to inflate the rest of the world, while the latter is trying to deflate the US. The US must win, since it has infinite ammunition: there is no limit to the dollars the Federal Reserve can create. What needs to be discussed is the terms of the world’s surrender: the needed changes in nominal exchange rates and domestic policies around the world.
And ...?  Here is the NY Times:
The Indian rupee is soaring — up 9 percent against the dollar in the last 16 months. That has taken a toll on exports like textiles by making them more expensive on the world market. And the strong rupee poses longer-term threats of overheating the economy.
So, one would expect India to take appropriate action?  Not yet ...
instead of fighting currency appreciation, as Brazil and some other countries have done, India has been willing to let the rupee rise — for now, at least.
India is simply too hungry for the foreign capital that is drawn to the strong rupee and is driving it higher, because that influx of money is helping support this country’s approach to developing a modern consumer economy.
Makes sense,right?  A developing country will need capital for all kinds of investments, and if foreigners are eager to send their money across, hey, grab that:

The influx of capital has helped fuel a nearly 9 percent annual growth rate for India’s economy. It has also powered the Indian stock market to near record highs. A big beneficiary of the stock rally has been the government, which is selling shares in state-owned firms like Coal India, the world’s largest coal miner.
The government, which has a large budget deficit, plans to raise $9 billion in the current fiscal year from share sales and spend the money on jobs for the rural poor and other welfare programs. A stronger rupee also reduces India’s bill for commodities, like oil, that it needs to import.
Imagine if China too allows its currency to appreciate ...

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