What will really make the rupee stronger?

May 29, 2012

In this issue:
» US shale gas is banking on Indian beans
» 500 projects get shelved in FY12
» Slowdown threatens to increase poverty
» Investment bank salaries still see a rise
» ...and more!

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The dramatic slide of the rupee has sent shivers down the spines of investors, businessmen, consumers alike. It is a worrying aspect for the government as well. The rupee hit an unprecedented string of all-time lows last week, falling as low as 56.38 to the dollar before recovering a bit since then. As the government struggles to reduce its deficit, a weaker rupee only adds on to the pressure.

This is because a steep depreciation raises the import bill further worsening the current account deficit. And given that India imports around 70% of the oil that it consumes, unless it becomes energy self sufficient, bringing the amount of imports down will be a challenge. While such a development is bound to be profitable for exporters, total exports have failed to trump imports and so the deficit has only widened.

In such a scenario, the government is looking to bolster the rupee by encouraging more foreign capital flows into the country. It is expected to announce steps that could include easing rules for overseas retail investors to buy local shares or bonds. The government may also conduct road shows in the Gulf countries next month to promote investments in India.

Before implementing any such moves, the government needs to understand why capital is leaving the country in the first place. Policy inaction, unfavourable tax rules have been some of the main culprits. Policy u-turn on retail FDI and the drama surrounding the Vodafone tax case has only made foreign investors jittery. Corruption scandals and coalition infighting has taken up much of the government's time rendering it ineffective in addressing some of the pressing needs of the country. Thus, unless and until the government shows some resolve in pushing reforms and making the climate favourable for conducting business, foreign capital may continue to elude the economy from a long term perspective.

Do you think that the measures proposed by the government will help in attracting foreign capital to the country? Share with us or post your comments on our Facebook page / Google+ page.

 Chart of the day
FY12 was a challenging year for the Indian auto industry. So how has the start to FY13 been? Not that well as is evident in today's chart of the day. In the month of April 2012, two-wheelers clocked the highest growth largely led by a healthy growth of scooters. Passenger vehicles also fared relatively better with growth largely coming in from utility vehicles. The slowdown in the economy took its toll on commercial vehicles though. Growth in this segment was led by light commercial vehicles (CVs) as medium & heavy CVs slipped into the red. Exports, which were the show stealer, in FY12 got off to a poor start in FY13.

Data Source: SIAM

Indian parliamentarians are too busy protesting against petrol price hike. We are all eyes on Iran to judge how much more will our oil bills move up. The gyrations of the rupee against the US dollar are giving the RBI governor sleepless nights. All this while the US is quietly using a resource from our own backyard to make itself energy self sufficient. Yes, that's true! As irony would have it, US shale gas drilling companies have developed a voracious appetite for the powder-like gum made from the seeds of guar or cluster bean. The gum is used to increase the viscosity of materials which are forced into shale fractures to enlarge them so that the oil and gas can be extracted. While few Indian farmers have achieved instant riches with what they now call 'black gold', others are yet to get a hint of the bean's 10-fold rise in prices over last year. India however, is the largest producer of the crop in the world. But the scope of growth doesn't end there. With the North American shale boom expanding to China, South America and Eastern Europe, oil drilling firms are poised to gobble up more cluster beans than ever before. If prices become unaffordable, they may however, look for substitutes. But if such useful resources get ignored by the government, India's energy problems will be here to stay.

Which is one of the most important factors that determines the growth prospects of any business? The answer is capacity expansion. If there is no addition in capacity, how possibly can a business grow? In a similar vein, an economy needs newer capacities to grow. So it is certainly a worrying sign if new projects are not coming on stream. Factors such as policy paralysis and difficulty in land acquisition have adversely affected the project pipeline in India. In 2011-12, more than 500 projects got shelved or were put on hold. It must be noted that these projects entailed total investments of about Rs 5 trillion. About 60% of the value of the projects shelved during the fiscal involved the core sectors. Projects in the power and steel space were the worst hit. You would be shocked to know that this is the highest ever shelving or freezing of projects in India. Before this, the worst record was in 2009-10 when Rs 2.8 trillion worth of projects were shelved. If you still have any doubts about India's slowing growth, you may want to reconsider your position.

The bottom of the pyramid is a difficult place to get out of. And with GDP growth in the country slowing, it is almost impossible. India's economic growth has slowed from over 8% seen in 2010 to around 6% in late 2011. The slowdown threatens to spread poverty and unemployment across the country. The benefits of growth are unequally shared, and the poor always get the short end of the stick. When the going gets tough, the situation really heat up for the poor of this country. The weak rupee, rising inflation and high interest rates make matters worse. For investors, going long on the economy makes sense, as the things should ease out over the next year or two. But the poor of the country, for whom daily survival is a challenge may not be able to wait that long.

It was Murphy's Law governing Indian energy sector in FY12. Everything that could go wrong did. Be it high crude prices, falling rupee, rising under recoveries or poor refining margins. What made things worse was state elections schedule that precluded revision of fuel prices causing state run oil refiners to bleed. Given the backdrop, the Government's decision to dole out subsidies worth Rs 385 bn to oil PSUs will soothe some concerns. This along with a prior compensation will take care of 60% of under recoveries. The rest will be taken care of by upstream segment.

The decision looks positive for refiners, but only from a very myopic perspective. The root of the problem is lack of a transparent subsidy sharing mechanism, high fuel taxes and regulated prices - issues that still remain unsettled.

Since the financial crisis that destroyed a few investment banks (IBs), profits in the space are under pressure. However, IBs globally have increased salaries by 37% over the past four years in order to retain staff and bypass regulations. This has unfortunately put the entire sector under the burden of higher fixed costs. The sharp increase in fixed pay has driven up its proportion from 30% in 2007 to 55% in 2011. Fixed remuneration includes salaries, pensions and benefits in kind. All this is set to add further angst over bankers' elevated pay. However, more regulatory changes are on the way that may reduce banks' profitability. This will help reduce pay scales over the next few years. Banks have also added caveats on variable compensation post the 2008 crisis, including the right to claw back bonuses. This move was implemented by Goldman Sachs, Morgan Stanley and UBS. Barely any banks used such measures in 2007.

In the meanwhile, the Indian stock markets have been trading well above the dotted line today. At the time of writing, the BSE Sensex was up by 99 points (0.6%). Sectoral indices were trading positively except FMCG and consumer durable stocks. Barring Indonesia, Asian stock markets were all trading strong. European markets too started the day on a positive note.

 Today's investing mantra
""The stock market is a no-called-strike game. You don't have to swing at everything--you can wait for your pitch. The problem when you're a money manager is that your fans keep yelling, 'Swing, you bum!." - Warren Buffett

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    11 Responses to "What will really make the rupee stronger?"


    May 29, 2012

    it is the crab story. no crab will allow the other crab to escape. that is the case with our politicians and everyone is just eying the party ruling now. how much has the opposition claiming to be clean blah blah. our great anna hazare has gone into oblivion. finally the politicians are having the last laugh. let us hope a heavenly maha purush comes and wipes out the villains and then we will have strong rupee.

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