Author: Aaron Chaze

INDIA TAKES STEPS TO CURB FALLING CURRENCY

By Aaron Chaze

The Indian government finally took steps to bolster inflows of US dollars after the rupee fell by 13% during the last three months of 2011.

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Giving buying power back to Indian consumers as the rupee reverses its recent fall

Photo Credits: Steve Estvanik / Shutterstock.com

Indian foreign exchange reserves dropped $24 billion during September-to-December 2011, to $297 billion. The Reserve Bank of India (RBI) also sought to end speculative trades in the Indian rupee. It withdrew the facility to cancel and rebook forward contracts for both domestic and foreign institutional investors and reduced the overnight FX open position limit of banks. The rupee gained 0.6% at the end of the first week of January.

Foreign investment in Indian securities picked up steam during the first week of January, according to the Securities and Exchange Board of India—as foreign investors picked up a net value of $102 million of Indian paper. Overall in 2011, foreign institutional investors sold a net of $560 million worth of equities compared to net inflows of $29.6 billion in 2010 and purchased $4 billion worth of debt versus $10 billion in 2010.

Interest rate reduction remains the key to India's economic and stock market performance in 2012. Economists expect a 125-basis-point reduction in the key lending rate, as well as a 25-basis-point cut in the reserve ratio for banks, beginning in the April-June quarter of 2012. The RBI has said that it will consider lower rates once it sees evidence of falling inflation—especially food inflation. For the week ended December 24, the weekly food-price index dropped by 3.36%, from 0.42% in the previous week, the lowest level in five years. The Wholesale Price Index—a key measure of total inflation—dropped to 9.1% as of November 30, a one-year low. The Indian Planning Commission said the government expects inflation to moderate by March 2012. Since March 2010, the RBI has raised rates 13 times, to 8.5%.