What do you think the best performing currency among the 10 most active currencies traded in Asia this year? If you take away the Thai Baht which is no longer freely traded, it has been the Indian Rupee which is up almost 10% since the beginning of the year. India's central bank, who is not happy with the currencies appreciation, had no choice but to raise rates yesterday to try and stem inflation. The central bank raised rates .5% yesterday and told lenders to set aside more cash to cover deposits. These moves are designed to drain liquidity from the credit markets and try to stem the inflow of capital which is increasing inflationary pressures. India's economy continues to grow at nearly 9 percent per year, second only to China in growth of the major asian economies.
The problem the central bank faces is similar to what has occurred in NZD over the past few months. The central bank will raise rates to fight inflation, but also wants to limit the appreciation of their currency. They have been trying to do both by raising interest rates at the same time as they are buying dollars and selling rupee to try and stem the rise of the currency. This can't last, they just don't have the deep pockets of China or Japan. I believe they will have to let the currency continue to increase, good news for the holders of rupee.
The Rupee has been holding steady at Rs. 40.50 for a few months now. But it looks like eventually the central bank won't be able to continue its manipulations and the Rupee will continue strengthening against the Dollar.
In India, real estate prices have been skyrocketing and there has been high wage and price inflaion. With the weakening Dollar, will offshoring tech jobs continue to make sense? Setting up an Office building is becoming increasingly more expensive, with commercial land in minor Metros reaching $2,000/sq ft! If this continues, it'll be cheaper to hire employees in the US! (So long as we go the Walmart route and don't provide them with health insurance) Maybe the weakening Dollar isn't so bad for the economy after all?
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