At a time when the global investment community is completely transfixed by Europe’s debt crisis and the potentially adverse consequences for the single currency, what has largely escaped attention up until now is the increasing pressure on Asia’s major currencies. Particularly noteworthy is the continuing collapse of the Indian rupee, which overnight fell further to a new record low against the dollar. Since the end of July, the rupee has lost more than 20%; since last Monday, the rupee is down nearly 4%.
It was not meant to be like this. India is one of the BRIC countries with massive growth potential. Some had earmarked India as offering greater risk/reward than China. However, so far this year, any dollar-based offshore investor has lost 35% on Indian equities. So, what has gone wrong?
India’s affliction is shared by many of its Asian neighbours right now. Highly leveraged to global growth, foreign investors have been fleeing high-beta economies like India. Concurrently, domestic conditions have also taken a dramatic turn for the worse. In the year ended October, industrial production fell by 5.1%, almost matching the nadir reached in early 2009. The government’s fiscal position is deteriorating rapidly with the slowing economy weighing heavily on tax revenues. High oil prices are also wreaking havoc on the trade side – October’s trade deficit of almost USD 20bln was the highest for 17 years.
Although the rupee is certainly the weakest of the major Asian currencies, it is not alone. China’s policy officials are engaged in a massive arm-wrestle with foreign investors – the latter have been attempting to get capital out of the country consistently over recent weeks, with the yuan hitting the daily permitted low on each of the past ten trading sessions. The Korean won is also under enormous pressure, down 10% since the end of July. With most of Europe burning, and Asia quite dependent on European capital, it is little wonder that Asia’s heavyweights are suffering.
