Will the Rupee sink again? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Will the Rupee sink again? 

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In this issue:
» FDI in retail approved. But has no takers!
» Diesel prices to be hiked every month
» January factory growth declines
» Does this mean China is not in slowdown?
» ...and more!

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00:00  Chart of the day
Last summer the Indian Rupee was giving sleepless nights to most people in the country. As temperatures soared, the Rupee burnt. Its values kept on depreciating vis-a-vis the US dollar. The rupee-dollar exchange rate touched new highs almost on a daily basis. And finally in June 2012, it touched an all time high of Rs 57 to a dollar. Weak GDP numbers, high inflation, weak capital inflows and India's deficit troubles were blamed for this fall. But come September, things took a turn. The government announced a few reforms and the Rupee changed its course. Since then it has come up quite a bit. The question now is will the Rupee continue on this track? Or will it change its path again?

An article in Firstpost cites some very valid reasons as to why the rupee could weaken going forward. The things that made the rupee sink in the first place, are still prevalent. The economy is still slowing down. Industrial production and output have been coming down. The deficit situation is not heartening either.

In fact the other deficit, i.e., the current account deficit has worsened further. Exports have been worsening. December 2012 was the eighth consecutive month with declining numbers for exports. This means that the amount of dollars flowing into India has been decreasing. This led the trade deficit to hit a new high in the month of December 2012 (as percentage of GDP; for the period April to December). At the same time the investment outflows have just been increasing. Therefore the trade deficit gap is only going to widen. This would hurt the Rupee.

Things are not so good for the second determinant of the rupee's value either. The second determinant is none other than inflation. The inflation gap between India and its developed trading partners has been widening too. Inflation particularly that of CPI (Consumer price index) has been spiraling upwards. It touched 10.56% in December 2012. The inflation numbers for India's major trading partners during the same period stood at 1.7% in US; 2.2% in the Euro area; 2.5% in China; -0.2% in Japan and 2.7% in Britain. As the gap between India's inflation and that of these nations widens, Indian rupee has to go down in value.

Therefore all indicators seem to be pointing towards much lower values for the rupee. So what is it that is stopping the rupee from tumbling down? It is our policymakers. They are firing all guns to attract foreign capital which is arresting the fall in the rupee. But is that good? Unfortunately no. The foreign capital being attracted is of the volatile nature. The kind that can flee as quickly as it comes in. And it is this flighty capital that is funding the current account deficit as of now. So till such time as this capital sticks around our currency will not sink. But the day it leaves the country's shores, the Indian rupee would sink again. A stiff rupee dollar rate could deal a massive blow to India's already critical fiscal deficit situation. Investors should keep such medium term contingencies in mind.

Source: Trent

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Here's yet another example of why it is dangerous to get excited merely at the announcement of reforms. It is extremely important to check out the progress on the implementation front. Simply because it is the latter that matters and mere announcements don't take us anywhere. In light of this, how are things looking on the retail FDI front? You would remember how the Government staked its entire reputation on getting this one bill on retail FDI passed. Unfortunately for the Government, foreign retailers haven't quite shown the same level of urgency. As per a daily, four months have passed since the green signal to retail FDI and not a single investment proposal has been received yet.

To be fair to the retailers, some of the riders are indeed tough for them to wrap their hands around. Plus there is the independence given to states to reject the FDI in their states if they so desire. This clearly puts restrictions on the number of cities foreign retailers can expand to. It is not as if all the issues are Government created. Some of the big retailers are themselves beset with problems which are using up considerable management resource. Thus, in view of these issues we won't be surprised if a big bang announcement on the retail FDI front takes a long time to come.

After having slept over the subsidy problem for too long, the government seems to have hit the accelerator on diesel pricing. As per the Oil Minister, diesel prices will be hiked by 40 to 50 paise per litre every month. This is until the gargantuan losses on the nation's most used fuel are completely wiped out. The government's directive earlier this month aimed at deregulating diesel prices was meant to offer some breather to loss making PSU oil firms. The fuel is currently sold at a loss of over Rs 10.80 per litre. Hence bulk consumers like defence, railways and state transport undertakings would have to bear the market price. This again is dearer by almost Rs 10 a litre as compared to retail selling rate. For one we believe that this reform measure was much called for and is well timed. The under recovery burden for FY12 itself was around Rs 1.2 trillion, up 55% on a year on year basis (YoY). However, the step to deregulate the fuel price at the user level should be simultaneously balanced by rationalising taxes and duties on diesel. Only then will the prices reflect actual supply and demand dynamics of the market without compromising the viability of the business.

January was yet another month of slowdown in the industrial activity. The HSBC Purchasing Managers' Index (PMI), an indicator of industrial activity in a country, stood at 53.2 in January 2013. The figure for the preceding month of December was 54.7. This shows that though industrial activity grew in January, but it was at a slower pace than what was seen in December 2012. The PMI survey indicated that most manufacturing firms in India seem to be drawing down on existing inventories. This means that they are using the back log of inventories to satisfy demand rather than manufacturing more. This indicates a slowdown in activity. Given that manufacturing forms a large portion in the Index of Industrial Production (IIP), in all likelihood, IIP numbers would not be very heartening either. This would further drag down the country's already slowing growth.

The RBI has cut down interest rates in recent months. At the same time it has also cut down the CRR rate. The higher liquidity is expected to boost investment and manufacturing activity to some extent. But will that help improve the situation?

Investors across the world are anxious to know the fate of the Chinese economy. Will it regain its growth momentum and salvage the global economy? Or is it that China's own financial crisis is in the making? There are people at both the ends of the spectrum. The views dance to the tunes of the data that keeps pouring in. Given that the manufacturing sector plays an important role in China economic growth and employment generation, many look for indications in this sector.

Recent data suggests that China's manufacturing expanded in the month of January 2013, albeit at a slightly slower pace than reported in December 2012. As per an article in Bloomberg, the official data on the Purchasing Managers' Index in the manufacturing sector was 50.4 in January, compared with 50.6 in December. It is worth noting that a reading above 50 indicates expansion. So as per this data, though the economy is expanding, the prospects are still shaky.

But there is another set of data published by HSBC. As per its Purchasing Managers' Index, China's manufacturing expanded to 52.3 in January. If you were to go by this data, then it may seem as if China has regained its growth momentum that had slowed during the latter half of 2012. Which of the two sets of data are more accurate? Your guess is as good as ours. The best thing to do is to not read too much into short term data. Let the economists and policymakers worry about it. As investors, you will do yourself a lot of good if you keep your eyes glued to the long term big picture.

The majority of the world stock markets registered gains this week on the back of positive data from China, Europe and the United States. The US stock markets gained 1.3% during the week. U.S data on employment suggested a modest growth in the month of January 2013. Besides, the index of national factory activity touched a nine-month high. The industrial output data for Eurozone suggested that January was the best month in a year. On the back of positive data, Euro reached 14 months high levels. The stock markets in Germany gained 1.1% over the week.

Most of the Asian stock markets registered gains over the week on the back of encouraging economic indicators from China. As per HSBC Purchasing Managers' Index (PMI), China's manufacturing activity expanded to a two-year high in January. Further, the statistics suggested growth in the profits of industrial companies in the month of December. The stock markets in China and Japan led pack of gainers with 5.6% and 2.4% growth respectively over the week.

The Indian equity markets were down this week. The Sensex was down by 1.6% for the week. Despite the Reserve Bank of India (RBI)'s announcement on monetary easing measures to revive the growth the economy, the investor confidence could not be lifted. The RBI cut the repo rate by 25 bps to 7.75 % and also slashed the cash reserve ratio by 25 bps to 4 %.

Amongst the other markets, Brazil was down 1.3% during the week while France was down 0.1%.

Source: CNNfn, kitco, Yahoo Finance

04:55  Weekend investing mantra
"An investment operation is one which, upon thorough analysis promises safety of principal and adequate return." - Benjamin Graham
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3 Responses to "Will the Rupee sink again?"

kamil nadeem

Feb 3, 2013

It was an article worth reading covering major indicators which can greatly help in investment and gives in depth background of the state of economy.

Thanks and regards
Kamil Nadeem



Feb 2, 2013

true genius personified.


varghese raju

Feb 2, 2013

No possibility, because of the reduction of interest by RBI as well as the new policies declared by the President of US Mr. Barak Obama.

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