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Buying Trouble

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BUSINESS STANDARD
Last Updated : Jan 28 2013 | 12:45 AM IST

The political fallout from Gujarat will retard stockmarket movements over the near term as investors wait for the situation to be resolved. It will also lead to a slowdown in FDI flows to the whole of India and a drop in the state GDP growth rate of Gujarat.

It may affect national GDP adversely since Gujarat was a fast-growth zone. This is all to the good perhaps, since there is nothing like being hit in the pocket to help convince the silent majority that watching from the sidelines as ethnic cleansing occurs is not an economically sound policy.

The rupee will undoubtedly see additional pressure as part and parcel of the entire fallout. For the past two to three years, capital inflows have been good enough to cause a steady addition to reserves, which are now well over the $54 billion mark.

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But a substantial part of reserves comprise short-term funds such as portfolio investments and NRI forex deposits that could be moved out quickly. This Budget also removed some capital account restrictions on NRI repatriation of income and profits from India.

As a result, it would not be surprising if quite a lot of money was pulled out of India in the next few months. Reserves are not likely to see depletion to dangerous levels. But the rupee will see an acceleration in its long-term downtrend. This will also have some important impacts on domestic money supply as well as the export/import position.

In the simplest terms, the RBI buys up dollars from exporters, investors, et al and supplies rupees in return. Sometimes it lets those rupees into circulation as

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First Published: Apr 27 2002 | 12:00 AM IST

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