The recent equity sell-down and currency fall in India and Indonesia have raised contagion fears across Asia, similar to the Asian financial crisis in 1997. What started off as a relatively contained sell-down in Indonesia and India is now turning into a confidence crisis. The Indian rupee has lost 12 percent since May 2013, making it the worst performer in the emerging market currency basket, Xinhua said in an analysis Saturday.

 

There is now widespread panic over the rupee, and the short-term measures imposed by the Indian government such as curbing the import of gold are widely seen as ineffective. In Indonesia, the sharp weakening in the rupiah and weak commodity export prices have caused its foreign exchange reserves to fall by a significant 18 percent year-to-date from $112 billion to $92 billion, fuelling investors’ concerns over the defensibility of the currency and the concurrent risks of sharp policy rate hikes.

 

The impact of capital outflows and financial turbulence as a result of India and Indonesia problems will undoubtedly be significant and widespread in other Asian emerging economies such as Thailand, Malaysia and the Philippines, where bubbles have been inflated by easy credit and super easy monetary policy. During the 1997 Asian financial turmoil, the currency meltdown in Thailand sent a chain reaction of weaker currencies, falling stock markets and a steep rise in private debt across Southeast Asian economies and South Korea, sinking most of them into deep recession.

 

CIMB research said for the rest of the Asian economies, recent developments in India and Indonesia should have very little negative economic impact. Backed by better regulated financial sector and stable domestic growth drivers, Asian financial markets should also be able to maintain a steady inflow of capital. Credit Suisse research believed that the impact of India and Indonesia sell-down upon North Asian economies such as China and South Korea will also be limited. (news.yahoo.com)

 

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‘Crisis unlikely due to currency depreciation’

Negative spillover effects from India in the Nepali economy have always been pertaining issue for the Nepali economy.  Crisis in value of rupee is the latest in the series. With the sharp depreciation of Nepali rupee (NPR) against the US dollar, caused by the devaluation and volatility in Indian rupee (INR), experts have started serious debate over the pegged exchange rate.

 

However, chief economic advisor at Finance Ministry Dr Chiranjivi Nepal ruled out the possibility of revising pegged exchange rate.  'The weakening of Indian and other Asian currencies is unlikely to bring crisis like 1997, now the economies are in better position compare to that period,' said Nepal. According to Nepal, the depreciation of INR will not continue for long time. Indian government has continuously putting effort to control the steep fall of value of rupee against dollar,” he opined, adding that it can be expected that Indian central bank will take aggressive measures to contain INR in a level. 

 

The recent massive depreciation of Indian currency has thrown all these logics out of the window and the situation calls for a serious debate on whether Nepali rupee should maintain the peg system. When asked about the review of existing exchange rate, Nepal rejected such calls. 'Nepali economy will encounter many problems if the existing exchange rate is changed,' he said. 'Reviewing the rate will ease the dollar price but cheaper foreign goods will influx the Nepali market and more money will be needed for the import of goods.' He further added that the government to take proper policies aiming to boost the export to take benefit from the strong dollar.