US Accelerates QT, Rupee Plummets, $2T in Foreign Capital Exits
01, Foreign Capital Exodus
The Indian authorities have released data showing that by the end of November this year, overseas investment institutions have sold off more than 2,000 billion rupees in the Indian stock market, indicating a significant withdrawal of foreign capital from India's financial markets.
Looking at historical records, a large-scale exodus of foreign capital also occurred during the 2008 subprime crisis, but the scale of this year's withdrawal is 250% of that year.
At the same time, figures released by the Reserve Bank of India also show that by mid-November this year, India's foreign exchange reserves have fallen to $547.3 billion, a significant decrease of nearly 15% compared to the same period last year, and also the lowest level since 2019.
An increasing number of international economists are worried that India, which has seen a good GDP growth this year, may only be experiencing a superficial prosperity. Under the influence of the United States' continuous interest rate hikes and balance sheet reduction, India may lose the support of funds, and its asset bubble could burst.
02, Accelerated Balance Sheet Reduction
It is well known that the United States began raising interest rates in March this year, and to date, it has accumulated a total of 425 basis points in rate hikes.
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However, many investors have overlooked the balance sheet reduction that the United States started in June. According to the plan, the balance sheet was to be reduced by $47.5 billion per month from June to August, and starting in September, the reduction was to increase to $95 billion per month.
Investors have not paid attention to this information because the Federal Reserve did not fully achieve the balance sheet reduction in the previous months. From June to August this year, the cumulative balance sheet reduction was $63.6 billion, averaging only $20 billion per month, which is only half of the plan.
The original plan for September was to increase the balance sheet reduction to $95 billion, but the actual completion was only $56.3 billion, which is just slightly more than half.However, according to the latest data from the Federal Reserve, we find that the reduction in the balance sheet was completed by $92.294 billion in November, indicating a sudden acceleration in the Fed's balance sheet reduction.
Over the past years, India's economic development has been greatly dependent on the excessive money supply from the United States. Now, with the Fed's significant balance sheet reduction, it means that funds will continue to flow back. The 200 billion rupees mentioned above being sold off and the continuous outflow of foreign capital have already shown this.
It is believed that more funds will flow out of India in the future.
03, Significant Depreciation of Exchange Rate
India's dependence on the excessive money supply from the United States can also be reflected from another aspect, that is, the increasing national debt of India.
International rating agencies predict that India's debt will reach 86% of GDP next year, while at the beginning of the COVID-19 outbreak, this proportion was only 70%.
Due to the increasing proportion of India's debt to GDP, rating agencies are very likely to further lower India's sovereign rating. This is a significant blow to India's future need to continue financing or repaying debts.
Affected by this, the Indian rupee has recently accelerated its decline.
From the annual line chart of the Indian rupee against the US dollar in the above figure, we can see that so far this year, the Indian rupee against the US dollar has depreciated by more than 10%.
Although in the past years, in most years, the rupee against the US dollar has depreciated, this year's depreciation has set a record.The last significant devaluation can be traced back to 2018, when the depreciation reached 8.24%.
Looking at the monthly perspective, out of the first 11 months of this year, the Indian Rupee's exchange rate fell for 10 months, with only a slight increase of 1.66% in November of this year, but this increase has been completely erased this month.
The continuous decline in exchange rates, the acceleration of foreign capital flight, and the increasing debt pressure following the appreciation of the US dollar have cast a shadow over India's development prospects.
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