India Financial Crisis

Brian Hicks

Updated August 26, 2013

Hold on investors – we’re in for more turbulence and descent in India. The rupee is falling!

The past several weeks have made many people anxious. The rupee has fallen 11% to historic lows. Last Monday, the rupee was only 63.12 to the U.S. dollar. Ouch!

india at nightWhat’s the cause? Ever since speculation arose that the U.S. Federal Reserve would soon slowly pull back its stimulus program, investors started pulling money out of emerging markets in fear the currencies would drop. While the Fed has yet to start – or even officially announce – its tapering, all of the lost money from investors has affected the nation’s currency.

To add insult to injury, India has a large deficit, which was caused by importing more than the nation exports. And though this could be viable if the demand were meeting imports, the reliance on foreign capital isn’t serving well.

Indian growth has slowed down incredibly to five percent, which is half of what it was just a few years ago. It sent the nation into a poverty stricken state.

To show how devastating the economy is in India, let’s look at the Big Mac Index, which is a way to compare common products in two or more areas of the world. Recently, Business Insider used the Big Mac Index to show how long it would take employees to make enough money to buy a Big Mac. In Australia, it would take an employee 18 minutes to buy a Big Mac. In France, it would take 22 minutes. In the United States, it would take 35 minutes.

Now, how many minutes do you think it would take an employee in India to earn enough to buy a Big Mac? It would take 347 minutes!

Projections for the Indian Economy

The Indian government has done the following to help stabilize the economy:

  • Restricted how much money citizens can take out of the country

  • Restricted the amount of money Indian companies can invest abroad

  • Reduced gold imports

  • Increased bank borrowing costs

Nizim Idris, currency analyst at Macquarie Bank, talked to CNBC regarding the rupee’s fall:

The rupee could overshoot to 64 to 65 (to the dollar) in the next few months. That is realistic, but after that, it could come back if we do find stability and we do find India hitting the right notes in terms of adjusting the policies and opening up foreign direct investment some more.

This sounds like good news, but the time it will take to stabilize the currency is still uncertain.

Jonathan Cavenagh, senior currency strategist at Westpac Institutional Bank, told CNBC that he thinks there will be an additional five percent weakness over the next few months. After that, he believes it should get better, with a turnaround in the fourth quarter.

What Investors Should Do

Idris and Cavenagh acknowledge the rupee will recover, even though it will take time. It’s likely you’re not keen on emerging markets, especially India, right now, but let’s consider what the falling rupee means for you.

One of the reasons the rupee has fallen is because investors have pulled their money out – but that doesn’t mean you have to follow. You know in investing you should go in low and sell high.

The undervalued rupee is making many investors jump for the realty market. The Associated Chamber of Commerce and Industry of India reported there will be an increase of 35% in property sales to non-resident Indians (NRIs) this year, according to the The Times of India. With the undervalued rupee, NRIs can get a lot for their money right now. When the economy improves, there will be quite a return on investment.

If you’re not a NRI, you can invest in companies and banks that are investing in the real estate market. Some of these include Kotak Realty, HDFC (NYSE: HDB), Aditya Birla Real Estate Fund, Redfort Capital, and JPMorgan (NYSE: JPM).

India has disappointed many foreign investors, but that shouldn’t lead you astray. Analysts believe the rupee will recover, and when it does, it’s the investors that have taken advantage of the lows that may end up with the biggest returns.

As long as you’re willing to make a long-term investment, the Indian real estate market may be perfect for you.


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