Market will remain irrational longer than what you think. This is what always happen across the world and markets. Indian Rupee was remarkably calm despite persistent high inflation differential with major trading partners as well as record high Current Account Deficit (CAD) for fairly large period.
INR was waiting for catalyst to onset the correction of the value of the INR against major currencies like USD. It was Ben Bernanke, chairman of US Central Bank in it's testimony, who has hinted possible withdrawal of massive liquidity in the light of strength gained by US economy. This has prompted investors to withdraw funds from emerging markets. India has also witnessed withdrawal by Fixed Income investors and this has put pressure on INR to depreciate.
One of the major driver for higher CAD is import of gold. RBI and Government of India (GOI) have taken measures to reduce demand for gold by introducing several measures which will take a while to have a meaningful impact. This along with strength in the US economy is presenting a strong case for the investment in index funds of the USA, as highlighted in the last week blog.
There would be two ways to benefit. The possible annual depreciation of INR against USD by 5% due to inflation differential in two countries. This along with expected increase in stock prices of USA as economy is piaking up. These two components will spice up your performance. This should be the part of asset allocation and recommend to have a weight of 10-15% of your portfolio.
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