The Indian economy is viewing latest levels of recession due to the demonetization issue. The rupee, which had been on an uptrend during the first quarter of 2016, fell to a record low level of INR 68.62 during the intraday trading on Thursday. The primary factor was the buying of US dollar by different banks and importers.
The currency, however, showed a recovery to reach 68.73 at the EOD. It was still a 39-month closing low even after RBI intervention to prevent the slide of the Indian currency.
The domestic currency of the nation has taken a hit of 4 percent since the demonetisation drive of higher denomination notes by Prime Minister Narendra Modi came into light on November 8. The current recession in the economy is expected to last for a few days until the pressure on the liquidity in the system normalises.
3 Factors Responsible For The Flattening Indian Economy
Here are the five factors which are primarily responsible to affect the economy.
- Foreign money outflow
The outflow of foreign currency from the nation has affected the purchasing capacity adversely. SInce November 1, the bond yield has plunged over 60 basis points as of now. In the same period, the US bond yield elevated by 2.35 percent against the 1.35 percent mark on 1st of November.
The FPIs have hence, liquidated their assets as a preventive measure. Since October 1, approximately Rs.16.936 crore worth of shares have been offloaded till November 23.
- Surging Dollar
The dollar index also hit a latest 13-year high on Wednesday owing to robust US data, which was a simple indication that the economy was performing against all odds. The dollar has been weighing unwittingly due to the several emerging currencies.
As we know, a surge in the dollar is a clear indication of increase in crude oil prices and several other implications. Hence, the surging dollar will lead to a bullish economy.
- Liquidity for the economic infrastructure
The physical currency liquidity has declined due to the demonetization issue. In simpler words, the citizens have less currency to expend. However, the interbank liquidity has shot up significantly and hence lower subsidies. The GDP however is still on a recession even after several steps to prevent its downfall.
According to current stats, banks have received approximated INR 6 lakh crores under reverse repo segment. The excess liquidity in the banking infrastructure has led to an under performing economy.
The rupee is hence considered to be on a recession spree till the EOY and only after liquidation is normal enough, the economy can be expected to observe a reversal in the trend.
According to several reports the emerging Asian economies have performed strongly compared to the previous year. However, a two-digit GDP which India plans to achieve has its own implications. A lot of FII money has seen a diversion to these markets specially after the MAT fiasco.
India has secured $4.5 billion as a preventive measure. However, other markets have planned to attract valuations on the basis of the declining Indian economy. Well, it may not be long enough when India realises its motive and achieve growth summed up with stability.