Tim Seymour: The Reserve Bank of India is on the longest campaign of interest rate tightening in recent memory, but traders are still moving away from both Mumbai stocks and the rupee.
Today’s 25-basis-point move is the tenth in a row, bringing the benchmark repo rate to 7.50%.
Unfortunately, inflation in India is also accelerating — faster than interest rates are rising to counter it — and this is part of what has been driving the country’s stocks down 14.3% from their November peaks.
Consider this: the Indian wholesale price gauge recently marked an annualized increase of 9.06%.
Indian interest rates are only 7.50%.
In other words, real interest rates are still negative. Assuming that all the parameters remain relatively steady, every rupee you borrow today stands a good chance of being worth less when you pay it back — even after adding in the interest.
Granted, there is nothing to guarantee that inflation will remain so robust. But in the meantime, it seems that the only impact of all these rate hikes is that it has become a lot more expensive for Indian companies to borrow or refinance their existing debt.
This, in turn, slows these companies’ expansion and erodes their profitability.
And with India’s central bankers warning that “short-term deceleration in growth may be unavoidable,” the odds of a slowdown for Mumbai are rising.
Bottom line: Not a happy scenario for Indian funds like iPath MSCI India Index ETN (NYSE:INP)
or PowerShares India ETF (NYSE:PIN).
While the technical situation may provide opportunities for chartists to move in or out and make money, the global markets simply need a sense that the central banker in India are ahead of the curve — not behind it.
Meanwhile, the rupee and funds like WisdomTree Dreyfus Indian Rupee (NYSE:ICN) will have tough sledding ahead.
Emerging Money provides insightful and timely information about the increasingly important world of Emerging Market investments. CNBC Emerging Markets Contributor Tim Seymour leads the team of Emerging Money to bring you cutting edge global news and analysis.
About Tim Seymour: Tim is a founder of Emerging Money. He is a founder and Managing Partner at Seygem Asset Management, and The Emerging Markets Contributor to CNBC. Seygem Asset Management focuses on investing throughout the global emerging markets asset class. With a view that emerging and developing economies will continue to outpace the economic growth and advancement of developed economies, Seymour has devoted a career to investing in the dominant markets of tomorrow, today. Seymour’s career has included significant experience in both alternative asset management (hedge funds) and capital markets, having launched two hedge funds, and built the largest Russian broker dealer in the USA. Seymour started his career at UBS, focusing on international credit (cash, swaps, forex) in a specialized hedge fund group (New York). Seymour completed the firm’s training program after graduating with an MBA in international finance from Fordham University. Seymour received his undergraduate degree at Georgetown University.