I am a fan of Asia and a firm believer that the next decade belongs to Asia.
And despite the various distractions, such as the debt crisis in Europe, I think we will be seeing fairly robust growth coming out of Asia for many years to come.
And one of the shining stars of Asia is India.
I have written several times from India, and about India, in the past few months. And each time it, has been about the humming and the sometimes frantic pace of activities I have observed. Businesses are bursting at the seams and the economy seems to be firing on all cylinders.
The dual challenge that India faces is that of inflation and trade deficit. And both of these are imports into India. How, you ask?
Inflation in India is primary driven by demand. There is a very healthy growth in wages, which is driving excessive demand for goods and services.
And while demand and internal consumption is great for an economy, unchecked inflation is a cancer on the currency of a country. It erodes the value of the currency. High levels of sustained inflation are also a symptom of excessive liquidity in the system. This has been caused by the reckless printing of money that was started by the Federal Reserve Bank — and it still continues to lead all central banks in printing money.
The rise in the trade deficit is also imported into India. The largest import item for India is crude oil. India has a very healthy rate of production, is relatively self-sufficient in capital goods consumption and production and could be considered insulated form the buffeting winds of the global slowdown, to a certain extent. The only challenge is that India has very little oil and has to import nearly all grades of oil.
The whole world is fretting about the slowdown in Europe. The Federal Reserve has already downgraded growth in the U.S. The IMF has also downgraded global growth by several notches. There is a cacophony of growing voices that China is about to have a hard landing and will slow down dramatically. And even if half of that is true, we will see a significant slowdown in Australia and New Zealand.
So the whole globe is slowing down, and yet oil has just topped $100 per barrel.
If demand is definitely declining, can someone explain why oil prices are on the rise? The prices have risen by 10 percent to 15 percent in the last few months. If this is not speculators, what is causing such a rise?
And once again, the unintended consequence of the speculators desire to create alpha is that India’s trade deficit is spinning out of control.
As the import bill for oil grows, the deficits grow. The Indian government has deregulated petrol prices in India. And as a result, the price of petrol rose. And the masses were so enraged, that the hapless politicians had to pull back the prices and increase their deficits even more.
As a consequence of this twin challenge, the Indian rupee has become the latest victim of the European debt crises and has declined in value by nearly 17 percent over the last three months.
The Indian rupee has just reached its lifetime low of 52.73 in intraday trade.
While business is booming and capacity utilization is very high, the currency seems to indicate that everything is going wrong in India.
I would consider this as a unique one time special price on Indian rupee. I cannot imagine this price will last too long. With CD yields at over 9 percent, we can enjoy capital gains and amazing yields if we have the stomach for a little more volatility.
© 2015 Newsmax Finance. All rights reserved.