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Reference Article: Dangers of falling rupeeC.P. Chandrasekhar
Context:
Cascading Impacts:
India a Bubble Economy? Periodic bouts of rupee depreciation that sometimes even trigger panic are a symptom of India being a bubble economy. There are many features that warrant it being characterised as one. The following contains how the Bubble expands and finally Bursts.
India's Failure to reap the true benefits of Liberalisation:
Impact of International Financial Investments/Large Capital Inflows (post Liberalisation)
Impact of Foreign Debt:
Credit Boom and Systemic Fragility:
Adverse Impact of Import Intensive Consumption:
Inflation Effect:
•Dependence on Imports along with depreciated Value of Rupee is likely to cause Inflation
•Due to high dependence on Oil Imports, the potential for Inflation gets Much Higher amidst the rise in International Oil Prices
•Central Banks are forced to follow Tight Monetary Policy and raises Interest Rates
•Such a situation causes slower Growth on account of reduced Investments
•The Economy thus gets trapped in Stagflation
The Bubble Bursts:
•Much of the Corporate borrowing in foreign currency (as in dig) is not hedged for possible losses stemming from any currency depreciation
•In an event of Depreciation the rupee costs of servicing foreign debt rise sharply
•Due to stagflation hurting the corporate profits, the burden of servicing Foreign Debts become unbearable
•This leads to Distress Sale of Assets following a Bankruptcy
•Distressed Sale leads to asset price deflation
Conclusion:
By: Chandan Sharma ProfileResourcesReport error
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