Side Effects of the Emerging Market!!

When you are enjoying a perfect weather with good surroundings at sea beach and suddenly, you heard a weather warring, please leave this place as soon as possible and go to a safe shelter. I am sure that first no one will believe in it, even though, who will pay attention to this warning will not like it at all. It’s hard to imagine when the sun is perfectly shining and there is no cloud in the sky, then how come any cyclone or storm possibly could occur?

It’s a human nature, when we are in the comfort mode either we become careless or take things for granted. The same is true for an economy, when real estate is on an upward trend, stock market is on all-time high, employment opportunities is quite reasonable, salary & business growth is excellent and the majority of people have enough money to buy luxuries them who will believe that there could be possibly something wrong in the future.

But it is the curse of the economics, which is bound by the rules and the first rule of economics says.

“Unexpected gain is directly proportional to unexpected loss”

The Indian economy has been booming since 2003 and the rate of growth in some metros is too high to digest. Property has been out of the range from the middle class and the companies experiencing a hard time to retain employees in the job.

All was well when country GDP was supporting these fundamentals, but for the last couple of years, this phenomenon is fading, GDP is going down year after year, foreign investment is losing charm and the unemployment rate and inflation is going up and up.

If we look for the reasons, you will not surprise to know that Indian economy is the role model of an Emerging market, which has been considered highly volatile & risky at global level, Indian economy, was booming very high in the recent years due to many reasons.

Western world & America were feeling the pain of the slower growth of the country's economy. There banks were holding a big chunk of cash and huge amount of savings were invested in the bond market, due to lack of momentum in the stock market more than a decade in the past.

American federal (like Reserve bank of India) reserve was pouring the tons of cheap money in the emerging markets though their stimulus plan and bond buying procedures. Since last couple of year’s American economy is on the right track, these plans are shrinking their funding.

Recently American federal announced that they will reduce bond buying from 75 billion dollars to 65 billion dollars per month.

In a normal way this news doesn’t make much sense to any politician or normal public, however, those people are in the banking & financial sector and in the investment business, they are sensing some big catastrophe will be coming in the near future.

Last time when American federal announced about their actions Indian rupees fallen from 58 Rs/$ to 70 Rs/$…. Technically, that was the first alarm, however, in the past couple of months rupees got some appreciation or in technical word correction and people forget about this.

But, last week when American federal announced their reduction in the stimulus plan, Emerging market has become highly vulnerable. As per one report which indicate that five countries, Turkish, Indonesia, India, Argentina and South Africa is at high risk. Recently a Turkish bank raised its overnight lending rate to 12 percent from 7.75 percent, its one-week repo rate to 10 percent from 4.5 percent, and it’s overnight borrowing rate to 8 percent from 3.5 percent – to avoid the free fall of its currency lira.

Same procedures have been applied by South Africa to save their nation's currency from free fall.

Argentina, Indonesia & India are on the edge; their currency is losing momentum against the euro and dollar.

In India signs are pretty visible, but unfortunately their economist is keeping a blind fold and avoiding warning sign continuously. There have been few steps taken by RBI in the past as reduction of the Indian rupees printed before 2005.

Reducing import limit and imposing more import duty on gold and other foreign items bringing from abroad to reduce dollars flow outside the India.

Due to election is due in the coming year, the Government is not in the mood to announce major harsh step as increasing the interest rate, devaluation of rupees and cutting subsidies on government sponsored programs.

For more than a decade, emerging market including India, was getting benefit from the cheap money provided by international market. IMF (International Monetary Fund) & World Bank was having plenty of dollars to give debts to developing countries like India, South Africa, Argentina, Brazil, Turkish, New Zealand etc. on very low interest rate.

A very high volume of easy money was flowing in the emerging market to give an easy and cheap loan to public and business. Now this honeymoon time is going to be over very soon.

If India will not cut their imports to save their foreign reserve and improve their export to maintain their debt ceiling, their balance sheet for international debt will eat their country's economy.

Due to lack of easy loan money in the coming future, first hard hit will be the real estate them stock market and finally this catastrophe will affect the local business. I am afraid to say it will be a domino fall or you can say the curse of the economy that if you go upward too fast you fall too hard on the ground.

By 
Kapil Kumar

Note: “Opinions expressed are those of the authors, and are not official statements. Resemblance to any person, incident or place is purely coincidental ”. The Author  will not be responsible for your deeds.