StringTheory wrote:I don't agree. The market would not go down much, but the rupee will. When rupee goes down more money will come into the market, pushing the market up.
The real question is how fast it should go up compared to the rupee depreciation. Finally most of the CSE investors will become losers with profits
“Losers with profits”?..... either you meant winners with profits or losers with losses
Anyhow there are more factors at play than rupee depreciation. Rupee depreciation is something which will not stop. Throughout history trend is such. It will only hold at a certain level for a while when cbsl controls it.
When rupee depreciates....
1. It’s good for export related companies and it’s bad for import related companies including manufacturing companies which import manufacturing material.
2. Cost of Imported goods in the country go up. If locally manufactured goods can’t meet the populations demand then prices go up and contribute to inflation
3. If rupee depreciates and global oil prices stay stable the price of fuel goes up locally and contributes to higher inflation
4. When rupee devalues and inflation goes up as mentioned in above reasons then people’s buying power drops and investments drop.
5. Foreigners get discouraged when rupee devalues because when they try to take profits or dividends out they get a lower return in exchange rates. So foreigners will also hesitate to invest.
Those are few points at a high level which happens when rupee depreciates.
For foreigners to invest rupee has to be stable
For locals to invest the bank interest rates have to be low. If bank FD rates are in double digits most people will keep their money in safe long term fixed deposits.
The economic impact due to rupee devaluation cannot be explained in a tiny post but long story short... if rupee devalues the money coming into CSE will dry up. It will not go up as you mentioned. That’s why GOSL is trying hard to keep rupee stable, restrict imports, increase exports, boost local production, keep inflation down, keep interest rates down. This enables people people to have money in their hands which can be put for investments. The big question is for how long can they sustain it until the economy becomes stronger so that they can ease import restrictions and let interest rates go a little higher.