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Home > News > India News > Article > Taking a nose dive

Taking a nose dive

Updated on: 21 May,2012 07:12 AM IST  | 
Alex K Mathews |

A number of factors acted as catalysts for the fall

Taking a nose dive

It was indeed the weakest week, as far as our markets are concerned, with the rupee nose-diving to a record low against the dollar. European tensions, weak economic data, falling currencies, FIIs pulling out money, all this increased the speed of the market fall last week with Nifty moving past 4800 which was considered a major support level. Over regulation and vigilantism will bring some order in the system but will reduce the investment attraction of our country. This is evident from the kind of fund pull out seen after the Union budget, and this is one of the reasons, which pulled down our currency against the dollar. Widening current account deficit has remained a worry for some time now and this is another reason for the fall in currency. Subsidies are eating up a major part of our revenue and the government choking investment avenues to shore up funds. Retrospective amendments regarding the implementation of GAAR have created fear and are still meant to cash the cow to the fullest, even though it has been postponed by a year.


Wrong
Authorities have now realised that they have gone wrong somewhere, and repeated interventions by the RBI failed to arrest the fall in our currency. Unless and until they take some bold steps to reduce the currency account deficit, the situation will remain weak. Bold steps include freeing up the price of diesel to check the unnecessary use of the fuel, so that the fuel price is determined by the market forces, which will reduce the import of oil which accounts for the country's major imports. Yes, we will have to face the brunt of rising food inflation and general rise in cost of living but in the medium to long term, we will see deficits coming down and people getting used to it. All of this should be coupled with governmental relaxation of norms that are now scaring away potential investors. If only investments come into the country, jobs will be created bringing money into the hands of the public, helping them to deal with situation of higher fuel and product price. In order to improve the current account situation, pushing exports is a good move and the government is likely to offer incentives on exports of items and reward exporters who diversify into new markets. Benefiting sectors include textiles, handloom, leather and carpets.


Global
Italian banks like UniCredit SpA and Intesa Sanpaolo SpA were among 26 Italian banks that had their credit ratings cut one to four levels by Moody's on weakened earnings and the country's economic outlook. Banco Santander SA and Banco Bilbao Vizcaya Argentaria SA were the biggies among Spain’s lenders, which were cut three levels by Moody’s Investors Service, citing recessionary fears and mounting loan losses. Nine firms were cut three notches and seven were kept on review for further reductions.


Spain managed to auction nearly $3.18 billion in medium-term debt but at sharply higher interest rates, showing the reluctance of investors to buy Spanish bonds on fears that the country may follow Greece. Many have forgotten the ongoing situation in Syria, which is still bloody and US observers were recently pulled out. Iran is believed to be continuing with its nuclear program to meet its power needs, which US and Israel believe to be for nuclear weapon making. Many in Israel believe that, the country and US have reached a plan to attack Iran before they transfer most of their nuclear facility deep underground beneath the Fordow mountains, making a military strike impossible. Some of them even expect this to happen before the US Presidential elections in November.

Rupee
The rupee was another major casualty with the currency falling to a record low of over 54.82 against the dollar. Sustained dollar buying by oil companies and FIIs pulling out money due to weakness in equity markets were some of the reasons. Fall in the rupee against the dollar may continue for some more time and if it breaks 55, then it will fall towards 56 levels.u00a0

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