No sooner had the news that India’s GDP growth had fallen to a 10-year low of 4.8 percent for the Jan-March quarter percolated than the dollar tsunami hit the Indian rupee. In just a week the rupee slid to a record low of 59.93, prompting the central bank to intervene and recover it to 59.57 by the day’s close. On cue, the stock market shed 526 points—the biggest fall in nearly two years.
While the dollar’s appreciation is good news for India’s $133 billion services export market, the economy’s growth is heavily import driven—the oil import bill of $160 billion is a glaring example.
A record current account deficit of $32.6 billion in the last quarter of 2012 (6.7 percent of GDP) was already a cause for alarm for India’s economic planners—the free-falling rupee has just made that a nightmare.
Indian companies with unhedged foreign currency loans are also going to feel the heat. These include blue-chips like BhartiAirtel, ACC, and Grasim Industries. The Indian economy is likely to get worse before it gets better.
The Sting in the Tail
However, there is a downside for the recovering U.S. economy—a strong dollar will hurt exports by making U.S. goods more expensive. Germany has weathered the worst of the Eurozone crises on the back of strong export performance, but U.S. exports grew by just 1.7 percent between May 2012 and April 2013. China overtook the U.S. as the world’s largest exporter in 2009, an ironic statistic when one considers that the U.S. economy at $15 trillion is more than double China’s $7.3 trillion (2011 figures).
Other markets are also feeling the effects of Bernanke’s announcement. Gold hit a two-and-a-half year low, and Brent Crude futures had their single largest drop since November 2012.
The aftershocks of this tsunami are not over yet.
The article Dollar Tsunami Hits Emerging Markets originally appeared on Fool.com and is written by Preetam Kaushik.
Preetam Kaushik has no position in any stocks mentioned. The Motley Fool recommends Southwest Airlines. Preetam is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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