India may slip into full scale economic crisis due to ramping inflation and currency devaluation

India’s rupee hits another record low against US dollar this week, with a depreciation of 44 percent. Seen until recently as an inexorably rising economic power, India now looks dangerously exposed to violent market swings and may be heading towards a full-blown financial crisis.

Until recently, India was constantly bracketed with China as an inexorably rising economic power; but with growth slowing sharply, the country is now among the hardest-hit of a string of developing countries that look dangerously exposed to violent swings in global markets\

The Federal Reserve’s $85bn (£54.2bn)-a-month bond-buying spree unleashed a global tidal wave of cheap money, which flooded into emerging markets. Since May, when Fed chairman Ben Bernanke announced his plans to “taper”, and eventually halt, QE as the US recovers, these investment flows have gone into reverse. Governments in developing countries face plunging currencies and stock markets together with rising borrowing costs and some analysts are even starting to draw comparisons with the devastating Asian financial crisis of 1997-98.

With the rupee plunging to record lows against the dollar, the authorities in New Delhi face a severe test, trying to control the likely surge in inflation, as imports become more expensive, without clobbering growth. Hasty policies announced this week include included a promise to inject liquidity into financial markets by buying $1.2bn-worth of bonds but brought only a brief period of calm before the sell-off resumed.

If investors lose confidence in India’s ability to fund its growing current account deficits, they could pile out of government bonds, pushing up interest rates across the board and squeezing the life out of the economy.

adapted from the Guardian

Indian rupee (photo Reuters)