Will the rupee continue to gain in 2014-15? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Will the rupee continue to gain in 2014-15? 

A  A  A
In this issue:
» Indian equities have begun 2014 strongly
» RBI leaves key rates unchanged
» Faber gives his view on loose monetary policies
» Is India beginning to attract serious, long term money?
» ...and more!

FY14 was an incredibly volatile year for the Indian rupee. While it began the year on a decent note, the QE taper announcement made by the Fed subsequently led the Indian currency to shed those early gains. The Fed's announcement in May 2013 hinted at a possible recovery in the US and so foreign investors chose to flee Indian shores and park their money in the US. The impact on the Indian currency was telling as it plunged to an intra-day low of 68.85 on August 28, a fall of 34% since the start of FY14. It did not help that matters back home were not favourable either. High current account deficit, no progress on reforms and sluggish economic activity also played a significant role in dimming the lure of India to investors. Thus, as reported in Firstbiz, FIIs pulled out over US$ 14 bn from India's debt market and over US$ 3 bn from equities between May end and August end.

However, FY14 has now ended and the rupee in the latter half of the fiscal managed to recover sufficiently well to close with a 10% loss. History has very clearly proven that foreign money plays a big role in determining stock market and currency movements in India. So it is obvious that the spectacular recovery by the Indian unit in the latter half of the fiscal was led by foreign investors once again flocking to India. And what has been the reason for their renewed interest?

Hopes of the Modi led BJP government coming into power, reduction in the current account deficit and easing inflation seem to be some of the primary reasons. Does that mean that we can expect another recovery of sorts for the rupee in FY15 as well?

It all depends. The recovery of the rupee in FY14 was more sentiment driven rather than any change in the ground fundamentals. Of course, the current account deficit did shrink but that was also on account of the curbs placed on gold imports. Exports did not really do too well.

A lot of hope has been placed on the BJP government coming into power. Although on the surface this seems like a possibility, one cannot say with clear certainty that it will indeed be the case. What more, assuming that the BJP government does come into power, a lot will depend on how agile and nimble it will be in terms of announcing and implementing key reforms.

Consistent reduction in current account deficit will require a much more long term solution than only placing curbs on gold imports. Improving the quality of exports and making them more competitive could be one solution. The other thing will be to improve the business climate in the country. This reached an all time low during the tenure of the current UPA government and began the process of the money leaving India for better investment opportunities elsewhere. Indeed, some retrograde policies announced by the current government were largely responsible for the rupee breaching the US$ 60 mark.

We are not experts in determining where the rupee will be headed in FY15. But post the conclusion of the general elections in May, if the new government does show that it is serious in getting down to business in terms of reforms and development, then it is bound to attract foreign capital into the country. And this in turn will rub off positively on the rupee causing it to appreciate further.

Do you expect the rupee to post more gains only if the BJP comes into power? Let us know in the Equitymaster Club or share your comments below.

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01:36  Chart of the day
When compared to peers, Indian stock markets have done quite well in the first quarter of 2014. Indeed, while China and Russia recorded losses, Indian equities managed to post gains during the period. So what has been the reason for this? Have India's fundamentals significantly improved? Not really. The rally has largely been the result of expectations that the BJP will come into power post the general elections in May. No doubt, inflation, which has been the bane of the Indian economy for quite some time now has eased. But whether Indian stock markets will emerge as top gainers in 2014 will depend a lot on what the new government chooses to do. And even if this new government is the Modi led BJP, it will be watched with close scrutiny in terms of what action it takes to get infrastructure projects going and taking the development of the Indian economy one notch up.

Will Indian indices emerge as top performers in 2014?

In-line with market expectations, the Reserve Bank of India (RBI) in its first Bi-Monthly Monetary Policy FY15 review has maintained a status-quo. The repo rate or the rate at which the Central Bank lends money to commercial banks remains unchanged at 8%. Cash reserve ratio or CRR is also kept unchanged at 4%.

Sizeable fall in inflation since December 2013 enabled the RBI to adopt dovish stance in the current policy review. But the risks to retail inflation (current 8%) remain on account of expected subnormal monsoons due to uncertain weather conditions. Moreover, the agricultural output is expected to remain sluggish in the next few quarters ensuring higher inflationary pressures. Depending upon the inflationary outcome, the GDP growth is expected to settle down in the range of 5-6% for the current fiscal. Besides, moderation in CAD during FY14 brought cheers to the economy and markets alike. However, for the year as a whole the CAD is expected to hover around 2% levels. But despite few positive economic developments, the consumption and investment demand continues to remain subdued. Hence, holding the policy rates at this juncture comes off as a wise decision. However, easing of supply bottlenecks and clearing of stalled projects would be instrumental in lifting the corporate profitability. This coupled with improvement in liquidity conditions would also provide the much required boost to the credit growth. Perhaps this slew of favorable economic developments would now be witnessed by the virtue of the new government and stable fiscal policy. And if the inflationary risks continue to remain on the lower side, a policy tightening in not on the cards of the RBI at least in the near term. For now, all eyes on the April-May 2014 general elections.

When it comes to understanding the global 'big picture', not many can match the brilliance of 'Dr Doom' Mark Faber. The Swiss gentleman is known for his no-holds-barred jabs at economists and policymakers. In a recent speech he talked about debt and how it has manipulated the global economy. While many economists don't see debt as a major problem, Faber has a very different take on it. As per him, expansionary monetary policies, such as QE, have an asymmetric impact on asset prices. For instance, the QE has pushed up prices of risky assets such as equities, but wages have not increased at a similar rate. So assets that shoot up disproportionately tend to enter into the bubble zone. Eventually, they crash and create serious fractures in the economy. To counter these adverse impacts, policymakers are then pressed to pump in more money into the system. In short, excessive debt tends to create a vicious cycle that can have very disastrous effects over the long run.

Investment is most intelligent when it is most businesslike, thus spoke Warren Buffett. For few years though it looked like foreign institutional investors (FIIs) investing into Indian markets did not particularly pay attention to this phrase by Buffett. For these inflows have mostly been fickle minded, exiting at the first signs of trouble. However, things seem to be changing lately. If a leading daily is to be believed, cumulative holdings of sovereign wealth and pension funds in Indian equities stood at US$ 35 bn at the end of December 2013. This compares with the total FII holdings of US$ 216 bn during the same period.

Put differently, these sovereign wealth and pension funds now hold 16% share in total foreign institutional investment. The same stood at just 9% in 2013. So does this mean that India has now started getting more serious and longer term money into its equities? Too early to say perhaps. The signs though are definitely encouraging as it is likely to bring more stability to the markets. And the more business friendly and more reforms oriented the new government is, greater will be the inflows from these sources we reckon.

As reported by Business Today, investor wealth increased by about Rs 10.3 trillion to Rs 74.15 trillion in the year gone by i.e. full year FY14. This is an increase of about 16%. In comparison, the BSE-Sensex gained by about 18.8% during the full year. As reported, the key driver for Indian stocks has been large amounts of buying activity by foreign institutional investors or FIIs, which invested a net sum of about Rs 800 bn in the year gone by. Gains have been particularly strong in the past six months, ever since the euphoria over the current government being ousted by the Bharatiya Janata Party in the coming general elections started. And predictions are that the rally would continue post elections if the same happens. Not to mention that all concerns related to inflation as well as the slowing economy also seem to have been downplayed because the things are expected to get better.

While it may seem that all signs do point towards better times ahead, we would like to remind investors to not given in to the hype. With too much good news around, it would only take one bad one to change the overall sentiments. In the words of Sir John Templeton, "The four most dangerous words in investing are: 'this time it's different." While we are not indicating that valuations of the broader markets are expensive, we reckon investors should continue with their bottom up approach and invest in good companies at not so-expensive valuations. If such opportunities do seem hard to come by, best would be to do nothing, in our view.

In the meanwhile, the Indian stock markets have turned flat after interest rates were left unchanged by RBI in its bi-monthly policy. At the time of writing, the benchmark BSE-Sensex was up by a mere 5 points. IT and Energy stocks were leading the gainers while banking and capital goods stocks were the major losers. Barring Japan, most of the Asian stock markets were trading in the green led by Indonesia and Hong Kong. Major European indices have opened the day on a positive note.

04:56  Today's investing mantra
"We don't get paid for activity, just for being right. As to how long we'll wait, we'll wait indefinitely." - Warren Buffett
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4 Responses to "Will the rupee continue to gain in 2014-15?"


Apr 8, 2014

I am very hopeful that Rupee will appreciate drastically under Modi led government and Dollar will sink like nine pins. Finally, at passage of time : 1 Rupee = 1 Dollar


Pritam D Tahiliani

Apr 5, 2014

It will only make possible if the Modi Led government come to power and will implement the policies which are being spelled in Modi's Pre-election speeches


D.K. Jain

Apr 2, 2014

Anticipating a decisive verdict in favour of Modi/BJP I feel the Rupee will gain strength and interest rates move southward.

Like (1)

RS Rathore

Apr 1, 2014

Definitely, the rupee will appreciate further considerably in NDA Regime. FIIs will flock in
once again with more enthusiasm undoubtedly.

Like (1)
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