India ready to face the global currency war

With China's economy in a slowdown and authorities adjusting the trading band of its currency frequently, the possibility of a currency war is increasingly becoming real.

China adjusted the central parity rate of yuan by 0.5 per cent to 6.5646 against the US dollar on January 7. The yuan has lost 5.8 per cent since August 10 when the Chinese central bank devalued the currency Stock Market Trading Tips

In its financial stability report, published on December 23, India's Financial Stability and Development Council (FSDC) pointed out that developments in China and the dilemma of the US Federal Reserve on its interest rates, along with competitive quantitative monetary easing policies of central banks across the world, might trigger a currency war.

"The European Central Bank's (ECB) promise to further its quantitative easing programme and similar action expected from the Bank of Japan, given the euro bloc's fragile recovery and faltering Abenomics, could trigger a currency wars despite an understanding evolved at the G-20," theFSDC report said Himanshu Tiwari Astrologer Blog

The Reserve Bank of India (RBI) Governor, Raghuram Rajan, who warned of an impending housing collapse in the US market at least two years before the world sank into credit crisis in 2007, has in the past one year warned several times about the perils of competitive devaluations. The RBI governor certainly does not see much of a gain in achieving a country's macro-financial goals by depreciating its currency. But he might have no choice if India's competitors decide that a beggar-thy-neighbour policy is what they should pursue to stay afloat in these uncertain times.

Even as the RBI's stated policy is not to manage currency risk, a sharp fall in the rupee despite its active intervention to manage volatility could still be in the realm of possibility, if global central banks persist with their easy money policy and China continues to depreciate its currency in 2016.

The rupee's fall could also be a necessity since relative to its trade partners, it is quite overvalued. On a 36-currency basis, the real effective exchange rate (REER) for the rupee was at 115.23 for export-based weights, while on trade based weight, the REER was at 112.88. The value has climbed up steadily in the past few years. In 2013-14, the export-based REER was at 105.48, which climbed to 111.24 in 2014-15 Indian stock market astrology prediction

On a six currency trade-based weight, the REER was 124.69 as on November.

"In REER terms, the rupee is enormously overvalued. Not only does this harm exports, such overvaluation harms domestic industries by facilitating dumping of cheap imports by countries," says A V Rajwade, a currency market commentator and consultant.

The rupee has depreciated just about five per cent against the dollar in calendar 2015, compared with a 20-35 per cent loss in currencies of Brazil, Argentina and Turkey. At the same time, the rupee's peers in Asia have fallen about seven to nine per cent over the past year.

"RBI's single point agenda is controlling inflation, but our currency policy is completely wrong. The rupee must depreciate to keep trades roughly in balance," Rajwade says Share Market Astrology
Bad for investors
Any depreciation of the rupee, however, is bad for foreign investors, who help India bridge its current account deficit.

"We are dependent on capital flows, so we cannot let the rupee depreciate excessively," says Saugata Bhattacharya, chief economist of Axis Bank . "A worry is that even as currencies of Brazil, Turkey, Russia, etc, have weakened substantially more in 2015, for a fresh investor now, there is a chance that those currencies will appreciate, and outperform the rupee," Bhattacharya says.

"We have an inflation differential of 3-3.5 per cent with the US and a productivity differentiation of 1-1.5 per cent. Hence, inter alia, the rupee can depreciate about 2-2.5 per cent per annum, while retaining our trade competitiveness," Bhattacharya adds Jackpot Stocks Trading Tips

In a recent Business Standard poll, currency consultants said the rupee will remain stable in 2016 with a slight depreciation bias, as has happened in the past few years.

How a currency war is waged
A currency war is waged primarily by advanced economies. The developing countries, which do not have much clout in the global economy, can only expect to dodge the bullet.

While China intervenes directly to depreciate or devalue its currency through peg adjustment (the central bank sets a parity rate and allows it to rise or fall by 2 per cent from the mid-point on each trading day), the European Central Bank, Japan's central bank and US Federal Reserve do it through rate adjustments and liquidity management.

Singapore does it by adjusting its nominal effective exchange rate (NEER) relative to the US dollar; the currencies of these countries are then used for carry trades in high yielding developing economies, and are withdrawn promptly when winds turn adverse. The volatility induced thus roils the developing economy markets eyeing a share of the pie in the global exports market Indian stock market astrology prediction

The Swiss National Bank's experiment with the currency, capping the exchange rate through active intervention, had to be repealed after three years in January 2015 as the central bank of that country risked exhausting its foreign exchange reserves trying to defend the peg. Many financial firms, the most notable example being Alpari, went bust. The country now penalises depositors for keeping money with its banks. Thus, the Swiss franc sloshes in the system and remains weak against the euro and dollar. This helps Switzerland's exporters and is a kind of currency manipulation.

The aim of every country is to use its currency as an indirect monetary tool to achieve its domestic goals. However, in a connected world, someone suffers. Developing countries, which are highly dependent on portfolio inflows to manage their current account deficit, are most likely to suffer as a result of this Share Market Astrology

Even though not apparent, a currency war has been simmering for a long time and now China's recent moves are adding fuel to the fire.

"China is really the elephant in the room. So far, China has depreciated its currency six times. Nobody knows what it is going to do next to pull up its economy," says a leading economic policymaker who does not want to be identified.

India's preparedness
"India has a wide range of options, including using its foreign exchange reserves to manage the rupee," says Bhattacharya of Axis Bank Indian stock market astrology prediction

The country has amassed substantial amounts of foreign exchange reserves - $352 billion, enough to cover 10 months of imports. India is also one of the most favoured nations among global investors because of its strong macro-economic fundamentals. The central bank expects prices to rise only about 4 per cent yearly in the medium term, the government has managed to bring down fiscal deficit below 4 per cent of the gross domestic product (GDP) and the current account deficit is only about 1.2 per cent of the GDP. There is political certainty in the country and oil prices have remained soft, helping the government mend its finances through higher taxes on oil. Even as portfolio flow has turned negative in the last few months, foreign direct investment, which is long term in nature, is positive. In the calendar year up to September, the FDI inflow was $26.52 billion, up 18 per cent from the same period last year.

"We are not complacent, but let's not bring the world down together. If things move from bad to worse, we will do whatever needs to be done," says the policymaker Share Market Astrology