Expert Zone

Straight from the Specialists

Making the most of a mini-crisis

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(Any opinions expressed here are those of the author and not of Thomson Reuters)

It all looked promising at the beginning of the year: the Indian rupee, like other Asia ex-Japan currencies, was appreciating against the dollar, to an extent on par with the Chinese yuan and just behind the Thai baht and Malaysian ringgit. Then came chatter in early May that the Federal Reserve was near gradually ending its money-printing program. The selloff in the rupee was rapid, and the currency lost more value than most of its Asian peers.

On Wednesday, Federal Reserve Chairman Ben Bernanke said the central bank will begin slowing the pace of its bond-buying stimulus later this year, triggering a global selloff that sent the rupee crashing to a record low on Thursday morning.

So how can the rupee recover? The quickest way is for the Reserve Bank of India (RBI) to use its dollar reserves to buy the rupee from the market, thereby stabilizing the currency. Some think the RBI can afford to do so because its foreign reserves are now equivalent to 15 percent of GDP, almost double the level in 1998. Then again, most other Asian countries have larger buffers, which renders the rupee more vulnerable than most of its Asian peers in case of future episodes of capital flight. In other words, supporting the rupee with reserves can only be short-lived and is a sure way of depleting India of international currency.

The key to solving the issue is reviving investment. One way to achieve this is for the RBI to cut interest rates further. It certainly has room to do so: both economic growth and the inflation rate are below 5 percent. Of course, the near-term casualty will be the rupee itself. Part of the currency’s attraction is the high interest rates in India than in the United States, so lower domestic rates would mean less attraction to buy the rupee, and a lower rupee would then mean higher inflation due to higher import costs. Already, the currency’s weakness has cancelled out the benefits of falling oil and gold prices in dollar terms. However, lower rates would stimulate investment in the real economy, as it would mean lower borrowing costs for companies.

What ails the UK and western economies

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(The views expressed in this column are the author’s own and do not represent those of Reuters)

The industrial revolution which missed India eventually resulted in this once developed and rich country being placed on the receiving end of a ruthless colonial enterprise.

U.S. vs China: which economy is bigger, better?

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A girl holds a U.S. and Chinese flag at the White House in Washington January 19, 2011. REUTERS/Kevin Lamarque/Files

(The views expressed in this column are the author’s own and do not represent those of Reuters)

One of the most surprising developments resulting from the financial crisis is the belief among ordinary Americans that China has become the world’s leading economy. This view appeared in the roughest times of 2009 and has persisted even though the impact of the crisis has begun to ebb. U.S. media have frequently conveyed the same belief. But it is patently absurd.

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