»5 Minute Wrap Up by Equitymaster

On This Day - 19 NOVEMBER 2011
Rupee is Asia's worst performing currency. Here's why...

In this issue:
» RBI warns of bias in banking system
» India's infra needs US$ 1 trillion
» Food bill faces human resource crisis
» Eurozone is headed for doom
» ...and more!
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The Indian currency, the rupee, has seen its value eroding in recent times. The rupee to US dollar exchange rate now stands at approximately s 51 to a dollar. This translates to a 14% drop in the value of the currency in the past one year. And this makes it the worst performing currency in Asia and the third worst performing currency in the world. So what or who is responsible for this slide?

Reasons like the global crisis are common to all currencies and it affects the rupee as well. Investors are wary about the comparatively riskier emerging market currencies. In addition to this are India's internal problems of high inflation rates coupled with high interest rates. This has brought corporate profitability under pressure which in turn has cheesed off foreign investors from investing in the country. This in turn has added pressure on the currency.

The falling rupee has in turn hurt India's import bill. India is a net importer of goods with oil forming the largest portion of total imports. A falling rupee has increased the cost of imports which in turn has increased the current account deficit. This deficit would need to be funded through borrowings or equity investments (Foreign Direct Investments or Foreign Portfolio Investments). This increasing deficit in turn causes worries for the investor which comes back to hurt the value of the currency. Thus it becomes a vicious cycle difficult to get out of.

So what is the way out? The country's central bank, Reserve Bank of India, can step into the foreign exchange markets and boost the rupee. But the Deputy Governor of RBI has clearly stated that the bank has no such intentions. It will intervene only in the event of excessive volatility. And not to control the slide of the rupee that we are seeing in recent times. As India's imports grow, the foreign exchange reserves will soon become inadequate to sustain the growing deficit. This would in turn lead to a higher demand for the US dollar which would lead to a further fall in the value of the rupee. And with the RBI clearly stating that it will not intervene, it looks like rupee will continue its free fall for a while.

Do you think that the RBI is right in not interfering in the foreign exchange markets to control the fall of rupee? Share your comments with us or post your views on Facebook page / Google+ page.

 Chart of the day
Inflation rates have been scorching in recent times. Prices of nearly everything have been moving northwards. An interesting question here is who has borne a bigger brunt of this rise? Is it the urban population or the rural? Today's chart of the day shows that barring housing, the incidence of higher prices in nearly every category has been higher on the rural population of the country. This can be seen in the breakdown of the consumer price index, which has been used as a proxy for measuring the incidence of prices in both the sectors.

Data source: Financial Express

The Reserve Bank of India (RBI) may not agree with Moody's downgraded rating for Indian banks, but it is certainly not too happy with the state of affairs. It is not just the quality of assets in the system that bothers the central bank. But the RBI smells a rat elsewhere as well. The concentration of lending to large corporates at the cost of financial inclusion has led to severe criticism for the PSU banks. The government has even insisted on the list of large companies that have defaulted on their loans. The PSU banks' inclination towards lending to large customers instead of rural borrowers has not paid off well. In the bargain they have also failed to live up to the financial inclusion targets. While state lending to poorly managed conglomerates is rampant in China, the RBI, given its reputation, needs to salvage Indian banks from such misdeeds.

That India's infrastructure is in complete doldrums is a known fact. Funding constraints, labor shortages and policy paralysis are prime bottlenecks plaguing the sector. To add to this, a recent study indicates that India's funding requirement for the infrastructure sector as a whole is likely to double in the 12th five year plan to US$ 1 trillion. With the government running a huge deficit and there being a considerable slowdown in private sector participation funding such a huge amount can prove to be major challenge. However, with steps being taken to set up an infra-debt fund and attract long term foreign capital into India, liquidity does not appear to be a grave concern. In fact, the government needs to focus on ironing out the bureaucratic issues which have proved to be a major roadblock on the execution front. While steps are being taken in this direction, passing of the land acquisition bill was a prime example; it is the pace at which the decisions are being taken concerns us. Perhaps, it is high time we see some real action on the ground, particularly on the execution side.

For any of government's social schemes to truly translate into the nation's well-being depends, besides other things, on accurate data. You need the right data about the masses that you want to target through a certain scheme. Only then can you channelise resources effectively and efficiently. However, the government's Socioeconomic and Caste Census (SECC) 2011 has hit a road block. To put things in perspective, the SECC survey came into eminence after a joint decision was undertaken by the Planning Commission and the Rural Development Ministry to do away with the state-wise poverty caps for social entitlements. And in its place to rank households as per deprivation indicators and give access to entitlements, particularly food, accordingly. However, the SECC is facing a severe human resource crisis. This will not only delay the survey, but also affect the implementation of the National Food Security Bill, on which the government is banking as a big vote gatherer.

That the Euro zone is going to hell in a hand basket is a widely known fact today. Its flaws are tumbling out thick and fast and investors are losing patience with every passing minute. However, there could have been hardly anyone who would've thought as way back as the year 1995 that such an event would indeed take place. Save for one gentleman perhaps. And he answers to the name of Bernard Connolly. A senior European bureaucrat by profession, Connolly took some days off from his work back then and came out with a hard hitting and an extremely prophetic book, The Rotten Heart of Europe. While we do not know the exact contents of the book, it is believed that the book is such an accurate prediction of what is taking in place in Europe right now that it looks like a very recent work rather than that of the mid 1990s. Needless to say, the book found hardly any takers even amongst the elite. In fact, Connolly was dismissed from his job for writing such an anti-establishment book. This event though teaches a very important lesson. It is not only important to take into consideration all view points before making a decision, it is even more important to consider opposing views, if any. Instead, the Euro Zone leaders chose to crush Connolly's dissenting voice and now, perhaps the whole of world will have to pay a price for it.

The insurance industry in India is hoping that the FDI (Foreign Direct Investment) limit in the sector gets raised from the current 26% to 49%. But for foreign investors to invest, there has to be some growth potential evident in the industry. And that does not seem to be the case at present. Statistics show that new premium collections are down 22% so far in FY12 and number of policies issued has dropped 17%. The most affected of the lot appears to be pension plans which do not have any takers at the moment as the guarantee clause has put many off the product. Hence, the government has come up with a three pronged strategy to boost insurance collections. The first is to give more options to customers in pension plans without any guarantee. One way to do this would be to remove restrictions in equity investments which will attract young customers who are otherwise shying away from the product. The second would be to revive ULIP (Unit linked insurance plans) plans but under a different product category and the third is to relax debt investment norms by allowing insurance companies to invest outside AAA rated papers. ULIPs, especially, have been one of the most mis-sold products in the insurance. Thus, whether these strategies if implemented will overhaul the sagging fortunes of the insurance sector remains to be seen.

It was a week of bloodbath for the world stock markets. Fears surrounding the crisis hit Euro zone continued to haunt the world markets. To add to this are new fears that the Chinese property markets may be overheating. Nearly all major markets ended the week in the negative territory.

The Indian stock markets were one of the biggest losers during the week with the BSE Sensex closing lower by 4.8% over the previous week. Even commodities like crude and gold ended the week in losses. Amongst the other world markets, France was down by 4.8%, while Germany was down by 4.2% during the week. Even UK and US lost gains recorded in the earlier week and were down by 3.3% and 2.9% respectively.

Source: Yahoo Finance, Kitco

 Weekend investing mantra
"I'd be a bum on the street with a tin cup if the markets were always efficient" - Warren Buffett

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