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India Needs To Brace Itself For a Predicted Currency War

20 Jan 2016 |By: Team Finalaya

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The latest business news in Hindi at Money Bhaskar concerns financial stability reports, which were released on Wednesday, December 23. The reports predict that India needs to brace itself for a currency war, as the rupee is making gains against the world’s stronger currencies. The current government is being advised that it will need to make certain adjustments in the near future in order to prepare for predicted volatility.

The World’s Banks Seem Set on Contradictory Policies

Business Standard is reporting that the recent modest interest rate hike in the United States has more investors getting bullish on the U.S. dollar, due to the increased economic downturn currently taking place in China. The country’s slowing economy has investors wary despite its importance to the world’s economy.

Financial Market Stress in China a Help to India

According to the Financial Stability Development Council (FSDC), “Financial market stress in China and monetary policy dilemmas in advanced economies, amidst a fragile global recovery, have led to increased uncertainty in the global economy. Adding innovations in financial markets to increase liquidity is also fueling more uncertainties in the markets, threatening financial stability, and should be checked.”

The FSDC believes India will stabilize despite weakness in its rural economy.

The Rupee Is Holding Its Own

India’s macro-economic fundamentals are considered to be improving, which is allowing the rupee to strengthen its position among other currencies. India’s government is currently committed to fiscal and economic reforms, and is considering putting a goods and services tax in place to compensate for its deficits. Tax collection is currently improving, but the country is in need of a more significant boost to keep its economy stable.

RBI Has Plans to Become More Active in Global Markets

The Reserve Bank of India (RBI) announced on Wednesday that it will soon be intervening in the currency markets. A short statement said the institution will intervene in the exchange-traded currency markets when necessary, in addition to regular interventions in over-the-counter (OTC) markets. Prior speculation by investors lead the institution to make these remarks, as it is believed the RBI has plans to avoid attacks by currency speculators, which could potentially have an adverse effect on the rupee.

Currency experts believe the RBI will be trying to exert as much control as possible over the foreign exchange markets, to keep foreign currency investors alert and on their toes. It cannot be predicted beforehand where and when the institution will intervene, but the anticipation is enough to ward off any games of brinkmanship investors might be planning.

Bank officials will surely be keeping a close eye on the upcoming U.S. Federal Reserve meeting, as well as further movement in Chinese currency. The devaluation of the yuan in August 2015 sparked global volatility, and China recently let the yuan weaken even further, reaching a four-year low.

There is tremendous pressure on India as an emerging economy, and the RBI wants to control the pace at which the rupee grows in order to keep the country’s economy as stable as possible.

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