Essay on The Fragile Five: Effects on International Business

The currency of India has been falling much recently against the dollar, as the risk adverse global investors start getting worried about the deficits, as efforts are being made by the central bank to stem the slide of the currency. According to Fact Set data, the rupee hit 54.44 against the dollar, in December, 2011. According to the analyst, it is expected that the rupee may continue to weaken further, as Eurozone jitters dovetail with the raising worries on the slow growth rate, fiscal deficits and the current account.

1). In 2016, the inflation rate was at 2.07 percent, and as of February 2017 the rate is about .90 percent (“Inflation Rate,” n.d.). As we can see, the economy has bounced back from its position during the recession. GDP has increased drastically since 2009, unemployment has decreased past its position from 2007, the interest rate has risen, and inflation has also gone up which indicates a strong and healthy economy. Although a higher interest rate is unfavorable for consumers and businesses, it means that the government is confident that the economy will continue to improve. This also means that consumers have enough disposable income to spend on whatever they wish, so the government does not need to lower the rate in order to encourage borrowing and spending. These metrics indicate that the economy has recovered from the Great Recession, and is continuing to improve.

According to AAFC (Agriculture and Agri-Food Canada, 2010) due to its extensive natural resources and geographical location, in the way of several of the world’s most important trading routes, Indonesia represents the Southeast Asia’s largest economy. On a global perspective, Indonesia is the fourth most populated country and has the largest Muslim population, besides being the world’s largest archipelago, with around 17,000 islands. The country’s GDP (Gross Domestic Product) is also showing considerable and stable growth throughout the years and unemployment rates dropped considerably (AAFC, 2011).

During the past decade, the country has maintained macroeconomic policies that controlled inflation and promoted economic growth. Inflation was at 6.5% in 2011, and urban unemployment reached a historic low of 6.0%.

In 2015 Australia had an inflation rate of 1.70% (Australia Inflation rate, 2016) and Indonesia’s was 4.45% (Indonesia inflation rate, 2015). The inflation rate is the level at which the prices for goods and services are rising. It is apparent that inflation is effecting Indonesia more drastically, causing an increased in the cost of goods and services. Indonesia’s high inflation rate correlates with their Consumer Price Index. This being the case, the cost of living is more expensive in Indonesia than in Australia, which effects the living standards.

The combination of almost 20 years of economic stability and the changes in economic policy created better credit availability. Credit availability in conjunction with greater household disposable income increased consumption and was the source of the country’s economic growth until the 2008 global financial crisis. Credit is not a sustainable driver, in 2008 the Government was forced to reduce credit in response to the global financial crisis to the which resulted in an immediate deceleration in growth and its dependency on domestic consumption.

The story does not end here, the real problem is the trade deficit and US debts that are destroying the economy and future plans of the people regarding the investments. The country is facing twin debts at a time; the national debt taken from the natives, and the debt from the other nations that has also to be return eventually. The remaining problem covers the trade deficit that has no chances of recovery in the near future (El-Agraa, 2011).

Worst financial crisis hit Indonesia's economy in 1997 to 1998. It caused instability in currency values, resulting Indonesian Rupiah depreciated to lowest level at 82.9% and low-level of competitiveness. This crisis had me to devote my interest to take International Economics as my education at the Faculty of Economics and Business of University of Indonesia. At my university time, I identified that exchange rate variability had a negative effect on trade and intermediate goods was one of key solutions to boost international trade.

Raising the interest rate is one of the most common measures taken by the government to fight high inflation.

The financial crisis in many countries in Asia in 1997-1998 was an unexpected event. It was mainly because most of the Asian countries had been enjoying economic growth prior to the crisis. The crisis itself started with the devaluation of Thailand’s Baht in July 1997. The Thailand government decided to float its currency in order to defend the Baht against speculative attack, despite its fixed exchange rate system. This decision was apparently the beginning of the economic downturn of many Asian countries, such as Malaysia, Philippines, Hong Kong, South Korea, and Indonesia. Before the crisis, Indonesia’s economy was growing rapidly; having a low inflation and a well-maintained current account deficit. However, Indonesia surprisingly became the country that was affected the most by the crisis. This paper aims to examine the effects of the Asian financial crisis in 1997-1998 to Indonesian economy and how it could happen.

The lending rate has remained high, averaging 16.92% over the last ten years and is significantly lower than the 23.4% rate in 2001. As Morrison (2011, p. 85) points out, high inflation tends to force up interest rates, to enable investors to achieve a real return on investment. From 2008 to 2010 and again in 2012, the lending rate increased with the inflation rate. The graph indicates that after 2010, the GDP growth rate did decrease due to the high interest rates. Higher interest rates also make disposable consumer income decrease which lowers the domestic product demand.

If I were financing trade with India, my biggest worry would be on Foreign Currency Translation Risk. This relates to conversion of a bank's financial statements from one currency to another. At a time when international credit markets experienced gross inflows of short term credit to India, major world economies were facing economic down turn. Even the United States whose currency is used in major international trade was at this time grappling with recession. The dollar lost marginally against major world currencies.

The system of banking in India is very extensive. The value of Indian banking sector is US$270 billion. And the deposit of the Indian banking sector is US$220 billion. Now the Indian banking sector has changed. Nowadays using of things like internet banking and core banking have made the daily operations of bank more easy to use. Mumbai is also known as the trade and commerce capital of India. These are the few basic things which are related to the Indian economy like Indian rupee is equal to 100 pause, the fiscal year is from 1 April-31 March, the trade organisations are WTO,SAFTA,BRICS,G2O and others. The current GDP growth is 5.8%.If we see the GDP in sectorial wise then in agriculture the GDP is 13.7%, in the industry sector the GDP is 21.5% and in the service sector it is64.8%The unemployment percentage in the urban areas is 3% and in the rural areas it is 2%.and in the numbers I id 10.8 million. The main industries in India are agriculture, petroleum products, chemicals, pharmaceuticals, software,

The India money market is a monetary system that involves the lending and borrowing of short-term funds. India money market has seen exponential growth just after the globalization initiative in 1992. It has been observed that financial institutions do employ money market instruments for financing short-term monetary requirements of various sectors such as agriculture, finance and manufacturing. The performance of the India money market has been outstanding in the past 20 years.

The reforms’ pertaining to the monetary policies and the macroeconomic policies over the last few years has influenced the Indian economy to the core. The major step towards opening up of the financial market further was the nullification of the regulations restricting the growth of the financial sector in India. To maintain such a growth for a long term the inflation has to come down further.