Which side of the currency wars will India join?

10/22/2010 2:24 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Is India next?

Will India be the next country to join the global currency wars? If you're counting votes at the upcoming G20 meetings, this isn't a minor issue. India could make the difference between agreement on a unified global response and go-it-alone chaos.

On October 15 Governor Duvvuri Subbarao of the Reserve Bank of India said that the bank may intervene “if inflows are lumpy and volatile” and disrupt the economy. In the last month the Indian rupee has climbed 5.2% as overseas cash has flooded into Indian financial markets. So far this year overseas investors have put $23 billion into Indian shares and bought $10 billion in rupee-denominated debt, according to Bloomberg.

But you know how the drill goes? A rising local currency means trouble for Indian exporters. Before the bank’s comments Infosys Technologies, India’s second-largest software company, had called on the Reserve Bank of India to act on the rupee. “We’ve seen the rupee go from 52 to 39 and back and forth,” Infosys CFO V. Balakrishnan said on October 15. “It will kill the whole export industry. The RBI has no choice but to intervene at some point in time like every other country. I’m not the RBI governor, but if I was, I’d do it now.”

India’s trade deficit hit $13 billion in August. That’s near the record trade deficit of $15.8 billion the country set in 2008.

Intervention by the Reserve Bank of India would be quite a turnaround for the bank. The Reserve Bank of India’s last five moves had been to raise increase interest rates in order to fight inflation at the wholesale level that had hit an 11% annual rate in April. Those increases finally bit as inflation fell to an annual 8.5% rate in August. Inflation then rebounded slightly to an 8.62% annual rate in September, according to numbers announced on October 15.

Data seems to indicate that India’s economy is slowing despite the slight increase in inflation in September. A September purchasing managers index put together by HSBC and Markit Economics showed growth in manufacturing and services slowing to the slowest rate in 10 months.

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