20 Oct 10 Indian Economic Growth & Weakness of Developed Nations
Two years ago, during a brief window of time in October 2008, there were a few days when the sudden and unexpected explosion of the Sub-Prime Mortgage Crisis was so intense that many leading economists and experts questioned whether the entire modern financial system may collapse. Banks rely on the ability to borrow funds from each other in order to finance day-to-day operations, but after the failure of Lehman Brothers, the interbank credit market froze up.
Banks are not the only business institutions that rely on credit in order to sustain daily cash flow levels, and when the interbank credit market froze in October 2008, businesses around the world nearly failed. In fact, if the credit markets had not loosened a little, chances are strong that, indeed, the entire global financial system would have failed.
Central Banks were fully aware of the lack of liquidity and lending in the interbank market, so it joined forces with the European Central Bank, Bank of England, and other major Central Banks around the world, and they all slashed short-term interest rate targets to all-time historical lows. In fact, the United States interest rate has remained at 0% to 0.25%. This incredibly low yield did not turn-off investors; moreover, capital flows into the U.S. dollar actually occurred at unprecedented rates, and a huge bull market in the U.S. dollar developed during the latter half of 2008 and the first quarter of 2009.
How Long Can Investors Earn No Money?
Due to extremely low interest rates, there is little incentive for an investor to leave funds in the United States right now. Currently, economic conditions in the U.S. have deteriorated materially, and the economic recovery is slightly faltering. Although a double-dip recession is possible in the U.S. and other states, but that is not the most likely scenario. The most likely scenario is that the United States will enter into a multi-year period of very slow economic growth. Deflation will most likely remain a threat.
Therefore, investors have no incentive to hold U.S. dollars. The Federal Reserve has made its dovish stance concerning the U.S. recovery very clear, and accommodative monetary conditions will not be tightened until well into 2011, and there is currently a strong chance that another round of quantitative easing will be introduced in the U.S., which will cause the dollar to fall further and investors to become increasingly hesitant concerning capital flows in the U.S. economy. Thus, if investors cannot earn yield in the U.S., where should they look? One definite answer is India.
Indian growth over the last decade has been exceptional, and it is only expected top continue into the future. Massive advancements in national infrastructure and technology are helping to aid an actual transformation in India. This economic transformation of India has already drawn countless investors in search of strong growth to the table.
Reasons to Invest in India
It is clear that developed nations are heading for a multi-year period of very slow economic growth and currency volatility in the forex market. At the same time, developing nations such as India, China, and Brazil are all moving forward at incredible rates. All three countries are posting GDP figures close to 10%, and most economists believe these high rates of economic growth will continue for years to come. Each year that the developed world struggles while China, India, and Brazil advance is another year that emerging markets such as China, close the gap of economic power.
The Indian stock market reached a 2 ½ year high around 20,000 and second quarter GDP figure came out at 8.8%. This level of growth is not only expected to continue and be sustained, but some economists believe that GDP could actually increase to about 10% by 2013-2015. As India continues to allow deregulation and free market principles to operate, the economy should continue growing. Two companies that should see strong growth over the mid and long-term:
- Tata Motors – As India’s economy continues to grow, domestic demand is heating up as Indians are buying cars, houses, clothes, and other basic lifestyle upgrades. Tata motors is India’s largest automaker and should see long-term growth.
- HDFC Bank – The banking industry in India is gaining strong footing and is definitely bullish long-term; however, there may be some volatility in the near-term. The Indian Central Bank has raised interest rates again in September in an attempt to curb inflation, and these interest rate hikes may continue. This will weigh in the near-term on bank profitability as credit market tighten and demand for loans decreases, but it should be a temporary setback.
Economic growth in India is here to stay. Incredibly strong infrastructure is combining with domestic demand and strong foreign capital flows to create a healthy state of economic growth that should continue for years to come. A Forex trading demo account can help you learn to how trade the dollar versus the Indian rupee.
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