Is rupee headed towards 70 per dollar mark?

Jul 5, 2013

In this issue:
» China could likely see a recession next year
» FMCG companies cheer the monsoon build up
» ECB and US Fed have a difference of opinion
» Is the commodity super cycle over?
» ...and more

Make no mistake; the direction in which our currency is headed is perhaps the biggest talking point in economics today. The rupee was recently accorded the status of a senior citizen. In other words, for the first time ever in history, it traded at a rate of Rs 60 per US dollar. And going by the turn of events, it looks in no hurry to retreat. As a matter of fact, some experts even seem to be predicting a level of 70 in the not so distant future.

What do we think? Well, we are no currency experts. But we do believe that if we get hold of some sort of framework of how exchange rates are determined, we can get some idea of future exchange rates. Mind you, like everything we do, this is likely to be applicable in the medium to long term. Just don't count on us for determining exchange rate a week or a month from now.

So, let's get started with the process of determining where the rupee will stand vis-a-vis the US dollar in the medium to long term. We believe that three factors account for the bulk of demand and supply of currencies and ultimately, are the key determinants of exchange rates. In fact, most of the factors can safely be grouped under these three key parameters.

These parameters are the trade flows, the hot money or the speculative capital flow and the long term capital or the non-speculative capital flows. Just as margins and return ratios can be called as fundamentals of a firm, trade flows can safely be called as the fundamentals on which exchange rates rest over the long term we believe.

And sadly, India does not have a very good track record on this front. Its large oil imports and low competitiveness on account of lack of infrastructure and reforms has seen it running a trade deficit for quite some time now. And given India's own fundamentals and state of its exports market, there is going to be no relief on this front in the near future as per us.

Money pumped in by FIIs or the speculative capital flow has rescued us numerous times in the past. But the hope is dimming even on that front we believe. Not only is capital flying back to the US, India's economic climate is also not providing support of any kind.

That leaves with things like FDI and debt inflows. While the former is an excellent source to augment forex reserves, it is yet again the corporate climate and lack of reforms that is throwing the proverbial spanner in the wheels. And while debt inflows can provide temporary relief, ultimately they have to be repaid and thus, have the tendency to cause capital squeeze if they come due all at once.

Thus, as we have seen, it does not need a detailed analysis to figure out that the rupee is not in the best of health. And its weakness hardly looks like a cyclical change which would correct itself. The malaise is structural we believe. Its riddance is going to require a surgery and not the band aid the policymakers seem to applying currently. Till such time, Rs 70 to the dollar does look like within the realms of possibility.

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 Chart of the day
Rupee is not the only currency that has come under fire. As today's chart of the day highlights, a lot of other emerging market as well as developed market currencies have taken it on the chin as well vis-a-vis the US dollar. South African and Brazilian currencies appear to be the worst hit. Besides the relative strength of US dollar what also seems to have hurt their prospects is the fall in commodity prices. But does that mean the US currency is the only currency able to hold its ground out there? Certainly not we believe. The US seems to be battling problems of its own and which is why we recommend readers to have a small percentage of their portfolio in gold.

Source: livemint

Fall from a pinnacle can be difficult to digest. Once living with the tag of one of the fastest growing countries in the world, China may experience a recession next year if Kyle Bass, a hedge funder, is to be believed. Bass may not be a household name in the financial world. Nevertheless, his prediction is quite bold and worth a mention. He feels that if the current credit expansion in China is not curbed, the country can experience a full-fledged recession next year.

While we don't have a great understanding of how the Chinese economy functions, we do know that the debt productivity of the country is on a declining path. In other words, it is taking in more and more debt to create a unit of GDP. This of course cannot last forever and once the music stops there will be a huge price to pay. Now, the question is will the Chinese policymakers be able to prevent the damage? Sadly, the stories doing the rounds do not seem to be giving any encouraging signs. Steps are certainly being taken but it could well amount to too little too late we believe.

The past decade saw the prices of nearly every asset class go up. But the super performers were the commodities. The price increase was so stark that the period has been termed as a commodity super cycle. One reason for this was of course the flood of cheap money. But a much bigger reason for this was the growth in China. The spectacular growth in infrastructure and construction activity in the country led to a huge demand particularly for the base metals, which led commodity prices to soar upwards. But those days seem to be in the past. For almost a year, commodity prices have been spiralling downwards. The slowdown in China, tapering off of QE by the US are just some reasons for this decline.

Now the question is what next? As per Credit Suisse another boom in commodity prices is unlikely. They do expect the prices of some commodity sectors like energy and agriculture to firm up. However, they do not expect another commodity super cycle like we saw in the past. In our opinion investors should be more focused on the long term trends and macro view rather than predicting next year prices for each commodity. The macro view suggests that the volatility and uncertainty in the global financial system has increased multi fold. Therefore it makes sense to be invested at least in part, in something that can protect the portfolios when asset prices witness a meltdown. And that something is none other than the yellow metal gold.

Agriculture continues to be a main source of income for rural India. Thus, the arrival of monsoon is awaited with bated breath. A good monsoon gives rise to a bounty crop and better income for farmers. In the past few years, the demand for consumer goods in rural India has been growing faster than in urban India. So FMCG companies with a major rural presence keep an eye on the rains. This year the rains have not only arrived early but are forecast to be normal by the Meteorological Department (MET). As a result, companies like Emami, Dabur, GlaxoSmithKline Consumer Healthcare and Marico have pinned hopes on improved spending in rural India arising out of a good monsoon. However, with nonfarm-income on the rise due to government aided programs, the monsoon magic has waned a bit.

The US Fed is yet to pull off the stunt and there are already many spoilers! Yes, we are referring to the US central bank's plans to unwind its US$ 85 bn a month bond-buying program by late 2013. As per Moneynews, the European Central Bank (ECB) has cited very different plans. Ones that do not indicate any possibility of interest rates in the West rising much higher. The ECB has in fact vowed to keep interest rates low for an extended period. Meanwhile the Bank of England (BOE) also left its bond-buying program unchanged at 375 bn pounds (US$ 565 bn).

Needless to say that the Eurozone is struggling to cope with economies like Greece, Spain and Ireland. Hence, choking credit to these economies could be a recipe for accelerated disaster. Therefore, as much as the US may want to undo its mistakes, it is very unlikely it will garner much support from Eurozone. And that will make the act tougher. Meanwhile, investors in emerging markets will have to rethink their investment strategies. It may be just be too early to take flight for the West.

Meanwhile, indices in the Indian equity markets are trading strong today with the BSE-Sensex higher by 135 points at the time of writing. Stocks from oil and gas and FMCG were seen witnessing the maximum gains. Asian indices also closed strong today with Europe too trading in the positive currently.

 Today's investing mantra
"Turnarounds seldom turn, and that the same energies and talent are much better employed in a good business purchased at a fair price than in a poor business purchased at a bargain price." - Warren Buffett

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    10 Responses to "Is rupee headed towards 70 per dollar mark?"


    Jul 6, 2013

    While the debate about Rupee's destination,CAdetc are raging , what is needed is cool - headed, hard-nosed decision and quick action, if we have to takcle this problem at its root., The root cause of these problems is that our foreign currency earnings are far short of our foreign currency expenditure. This simply means we need to raise exports on a war footing.

    There are huge markets andmoney in exports of items like :

    Fruits, vegetables, flowers, cereals, etc. etc.

    And we are among the largest producers of these items in the world.

    The immediate task is to enhance the productivity, quality, packaging and quick tranportation to ports ( air/Sea) and of course, make procedures clear enough for exporters to speed up movement.

    Unless until we take such fundamenatl actions with what is possible in the immediate future, our guessing game can only get nastier.

    Like (2)


    Jul 6, 2013

    How US dollar is strong? My answer is ONE and ONLY their OIL drilling saved them. US is the highest consumer of oil in the world and Now, US is the highest producer of oil in the world. So, no more imports and no more heavy expenditure.
    Now, looking at India, what is our oil imports? In my opinion atleast 350 million dollars per day. How to meet this huge amount while our exports are affected. There are two solutions:
    1)Begging to FIIs to invest in stock market and by selling shares to FIIs at scrap price which is an easy solution and remain bankrupt and keep on beg.
    2)Start oil drilling by using our Indian companies by paying in rupees. All our oil drilling companies are out of business. See their poor quarterly results.
    At $ 100 a barrel, even if 50% water come with oil drilling, it will be cheap for us. Who understand this?
    Do our indian economic experts know what is oil drilling?

    Like (2)


    Jul 6, 2013


    Like (2)

    parimal shah

    Jul 6, 2013

    It is only a matter of few weeks before the rupee becomes very senior citizen of 70 or even 75. If there was any doubt - the food security ordinance has ensured this will happen sooner than later (and this will fetch more money when foreign hidden wealth is brought back for elections by dubious route/s from foreign banks etc).
    The fed's QE (money printing business and almost zero interest rates - of US and many others - Japan, ECB etc - has ensured that all economies of the world, including that of their own) are ultimately destined to become useless - and there is a huge world-wide economic disaster in the waiting to happen.
    By QE US has ensured peril of most of the developing countries but not realized that this is a lose - lose situation for all economies of the world.
    We can only pray to God to save the world economy so that ours is also saved.
    This UPA guys should have a life time ban (like in Cricket) from politics.

    Like (2)

    D. P. Joshi

    Jul 5, 2013

    Our IT industry is heading for a slowdown particularly with the H1B and Immigration law likely to be passed by American Congress.IT industry has to reorient it's operational strategy and change over to MNCs in true sense of the word.Our oil consumption and and the resulting increase in the "Current Account Deficit" is a matter of great concern as also the sizeable expenditure in the "Food Security Bill" which is sure to increase our unproductive spending and increase budget deficit. All this would inhibit FII's interest in our economy.Rupee is, therefore, sure to reach 70 to a Dollar in the next three to four years.

    Like (1)

    sunilkumar tejwani

    Jul 5, 2013

    at least not in the short to medium term. sooner or later rupee may settle around 54 mark.

    Like (1)


    Jul 5, 2013

    As long as we and our governing body does not follow even the basic descipline in all walk of life, the present pain grows in astronomical way and entire country will be in ICU.
    Britishers have ruled for three centuries and quit, present disease is for ever. We are in a suicidal path. thanks to Dr.Economists then there can not be any supply and demand problems along with life.

    Like (1)

    C K Vaidya

    Jul 5, 2013

    Two comments:
    a) Two other fundamental variables need attention, namely, inflation and real rate of interest in Indian economy vs its major trade partners. So long as we have a high inflation, it is bound to exert pressure on rupee.
    b) Infrastructure can't be built overnight, in fact, even a period of 3 to 5 years may not be enough to change the situation on ground. However, if the next govt begins an earnest effort in building it, expectations of improvement can spur flow of long term funds into India. That can help stabilise rupee in its downward spiral. If not, then even Rs 70 to a dollar may be too little.

    Like (1)


    Jul 5, 2013

    thanks.Over all views are good taken for economic ride but what who has beaten path and want recover?thanks

    Like (1)


    Jul 5, 2013

    Rupee is on a one way ticket to the 70 mark if --
    -Crude moves from 100 to 140 dollars a barrel
    -Fertilizer, Gold And Edible oil consumption remains at current terms in quantity. Incase any increase in Quantity then rupee will tumble furthur TOWARDS 75 MARK
    -Current account and Fiscal deficit remain in excesses of 4 percent.

    The Food security bill is the last nail in the coffin for the rupee .

    Like (2)
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