The rupee has been remarkably stable in recent weeks, certainly compared to many other Asian currencies. HSBC Analysts don’t expect this stability to last. Much of the rupee’s weakness last year appears to have been driven by a significant outflow of equity capital (USD9.26bn during January-September 20008). We suspect there is more outflow to come from this source before this cycle is done.
India last year (in the first three quarters at least; the period for which we have data) saw record inflows of both Foreign Direct Investment (FDI) and remittance capital. The boom in FDI (USD23.05bn) is long overdue, but cannot, in our view, possibly last, given the state of corporate finances globally. In fact, our estimates suggest that FDI into Asia could fall to roughly zero this year.
The rise in remittances has been particularly spectacular – from USD19.1bn in 2003-04 to USD26.51bn over the past four quarters (ending September 2008). To the extent these flows are labour-market-related. The issue now of course, is that as labour markets deteriorate globally, and in a synchronised fashion, these flows should soften sharply.
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