US recovery hits India like a ton of BRICs

The rupee fell to a record low yesterday. Is this the end of emerging markets' glory days?

by Emma Haslett
Last Updated: 20 Aug 2013

What’s going on with the BRICs? As the western world crumbled, high-growth economies like Brazil, Russia, India and China appeared to be positioning themselves as the world’s next global leaders. Now, everything’s going to pot.

To India first, where the central bank has introduced restrictions on capital outflows as the value of the rupee plunged to a record low against the dollar yesterday. In the past six months, the rupee has shed 11.75% of its value against the US dollar.

In an attempt to stabilise the currency, the bank reduced its capital outflow limit to 100% of investors’ net worth, down from 400%.

There are also new restrictions on Indians sending money abroad – particularly to buy property. Given that the London property sector is increasingly reliant on rich people from foreign countries ploughing money into the notoriously stable ‘Prime Central London’ residential market, that’s equally bad news for UK estate agents.

Growth in the Indian economy has been slowing for some time, with GDP increasing by just 5% in the year to March, its lowest in a decade. And India’s reliance on export is increasingly becoming a problem: the rupee’s latest plunge has been blamed on data from the US showing it’s recovering. The worry is that cash will flow out of India and back into the American economy. Hence the drop in value.

The problem is that in trying to save the rupee, the Indian government may stymie the Indian economy. Rajeev Malik, a (frustrated) senior economist at investment bank CLSA, pointed out that with the new restrictions on top of those that already exist, ‘the government is unable to improve business conditions locally and now will restrict Indian companies from overseas expansion’. Not exactly conducive to ‘saving the rupee’.

China, another of the BRICs, is experiencing an altogether different problem: a new report by Peking University suggests the country has been publishing ‘wilfully fraudulent’ data on inflation and GDP for more than a decade.

According to a Times interview with Christopher Balding, the report’s author, China may be overstating the size of its economy by as much a $1tr.

In fact, 'given how easy it was to spot obvious statistical manipulation, it is likely that there is plenty of less obvious fraud and even larger revisions may be required’.

But hey – what’s $1tr between friends?

So is this the beginning of the end for emerging markets? A report by Morgan Stanley has highlighted the ‘fragile five’ currencies which it considers most at risk from a global financial recovery.

As well as the Indian rupee, it includes the Brazilian real, the Turkish lira, the South African rand and the Indonesian rupiah. Over the past year, the real has dropped by 15.2% - and if that report into Chinese growth is correct, it’s only a matter of time before the Yuan heads in the same direction.

So all is not solid in the BRICs at present. But we wouldn't write them off just yet - it's going to be hard to put all those emerging middle classes back in their boxes.

- Image: Flickr/Saad.Akhtar

Economy Misc

Find this article useful?

Get more great articles like this in your inbox every lunchtime