The Indian stock market fell today as the central bank indicated that a round of intervention aimed at limiting gains in currency may be on the way. This prompted concerns that the current record flow of foreign fund inflows into the country may be dampened.
Volatility in the currency is likely to have a detrimental effect on the export market in India. As a result of the speculation, the Sensex, or ombay Stock Exchange’s Sensitive Index, fell by 1.8 percent, or 372.59 points to reach 20,125.05 by the close of trade in Mumbai. This is the second consecutive week of decline.
Over the year the Sensex has been one of the world’s best performers, with a 15 percent rally and a 66 percent increase in foreign fund inflows which is why there is so much concern around the impending currency interventions and its possible ramifications.
The news of an intervention comes as the rupee gains in strength. In the last month the rupee gained 5.2 percent and global investors have been taking advantage of the strong economy, pouring 1.07 trillion rupees, or $24.2 billion into the Indian stock market and around $10 billion into Indian currency debt.
Reserve Bank of India governor, Duvvuri Subbarao said that the bank may have to intervene “if inflows are lumpy and volatile” while the deputy governor of the central bank, Subir Gokarn commented that: “It comes down to a balancing act between making sure there’s enough money to finance your current-account deficit, but at the same time not do any serious damage to people whose competitiveness is undermined for no fault of their own.”
