Is the fall in the rupee a short term concern? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Is the fall in the rupee a short term concern? 

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In this issue:
» Pressure mounts on China's labour market
» Rogoff urges central banks to love inflation
» FDI in retail will take more time to pick up
» Risks mount for junk bonds in Asia
» ...and more!


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00:00
 
The last two months have seen the rupee sliding considerably against the dollar. Since the start of May it has lost around 7.7% against the greenback. The major concerns seem to be expectations that the US Fed is most likely to pare back its quantitative easing program. This has raised fears that the foreign money finding its way into India will be lesser. But this is more of a short term concern.

Indeed, the rupee weakening against the dollar is nothing new. It is a trend which has been consistently evident since the last two years. What it instead highlights is a much more structural and deeper issue that the country is facing. One of the root causes of the rupee's free fall was the complete indifference of the government towards reforms. This raised concerns over the viability of doing business in the country. That is not all. Rising fiscal deficit and slowing economic growth have also been compounding woes.

On the fiscal deficit front, the government has been caught in a vicious cycle. One of the main reasons for the rising deficit has been the surge in gold imports. The government has been trying to curb this without much success. But the problem is that gold imports have been rising for a variety of reasons, one of them being that it acts as a hedge against inflation. And the latter has been firm for quite some time now. And even though the wholesale price inflation has been waning, consumer price inflation has been at elevated levels for quite some time now.

The government has been taking steps in the right direction. It has introduced some reforms such as FDI in retail and reducing spending on subsidies. But on the implementation front a lot still needs to be done. More efforts also need to be seen on the infrastructure front so as to build up confidence in both Indian and foreign investors to put money into projects. Once more seriousness is seen from the government's side, there is no reason why investors will not make a beeline once again for India.

Do you think that the fall in the rupee against a dollar is only a short term phenomenon? Please share your comments or post them on our Facebook page / Google+ page

01:26  Chart of the day
 
There is no doubt that GDP growth both in India and China has considerably slowed down. In India, growth in FY13 was the lowest in a decade. But when compared to their peers in both the developed and the emerging world, they have still done better. Indeed, as today's chart shows, China and India lead the pack with respect to growth in the March 2013 quarter. Having said that, overall this still does not bode well for the global economy. Growth in the developed world still remains weak and it will be a while before there is a recovery. It was hoped that healthy growth in the emerging economies would rebalance overall global growth. But judging by the performance in these countries, that alas does not seem to be the case.

Data Source: The Economist


02:01
 
Stains are good, exhorts an ad for a leading detergent brand. Much in the same vein, Kenneth Rogoff, a former chief economist at the IMF believes that inflation is also good. In a recent article, Mr Rogoff has urged central bankers to not dread inflation but to love it. He is of the view that instead of taking away the stimulus, there should be more of it. "The trouble is that this is no ordinary recession, and a lot of people have not had any punch yet, let alone too much," he goes on to add. He also observes that it would be a catastrophe if we listen to anti-inflationists as it would lead to a similar outcome as in the 1920s and 30s when central banks were obsessed with gold standard.

Well, Mr Rogoff seems to very conveniently give an example of the 1920s and 30s. However, what about the Zimbabwes and the Argentinas of the world? Here, the very same policy that Rogoff is in favour of caused tremendous damage. We think it requires nothing more than common sense to figure out that a problem caused by excessive devotion to leverage and money printing cannot be solved using the very same tools. It will lead to nothing but greater disasters. And sooner people like Mr Rogoff come to terms with this reality, the better it will be for the global economy we believe.

02:46
 
Over the last couple of decades China has risen as the dominant global manufacturing hub. The extravagant consumption habits of the West were sustained by China's gigantic but cheap labour force. But things are changing now. The excesses of the West culminated in the 2008 financial crisis. The series of crises that continue till date have brought down consumption levels in these economies. On the other hand, wage costs have risen very sharply in China. Add to this an appreciation in currency. All these factors put together have severely affected Chinese exports, which are the mainstay of its economy.

China's transition from an export-oriented economy to a consumption-driven one is going to be quite bumpy. The slowing export market is already having several adverse impacts on the Chinese labour market. An article in the Wall Street Journal points out a rising number of strikes and worker protests in the southern export region. About 201 labour disputes have been reported in the first four months of the year alone. This is twice the number reported during the same period last year.

All these factors point to the fact that the slowdown in China is imminent. And this will, in turn, have repercussions on the global economic recovery.

03:21
 
In a landmark decision, the Indian government had approved FDI in retail. But foreign investors do not appear to be too keen to speed up their investments in the country. Crisil has stated in a report that it does not expect foreign retailers to make any big ticket investments for at least 2 to 3 years. The reason for this is the rules laid down for FDI. Retailers have to make greenfield investments of at least US$ 100 m as a condition for entry into India. Given the depressed macroeconomic scenario, most companies are curbing or cutting back on their investment plans. Therefore making such an investment right away may not be too feasible. Moreover India itself is battling its own issues like political uncertainty, slowing economic growth, etc. In such circumstances, investors are expected to be skeptical about parking their funds in the country. This is something we have been writing about since the FDI policy was approved. India has to effectively deal with its policies and reform them to make the investment environment conducive. Otherwise simply approving FDI would not really help.

04:07
 
The world's largest bond fund managers are worried. The issue of junk rated bonds has gone up three times in 2012 alone. And at a time when investors should be investing in bonds that are safe, this is a worrying sign. As per Moneynews, PIMCO is particularly worried about the issue of junk bonds in Asia. With growth slowing down in the continent, companies issuing bonds with low credit rating warrant caution it believes. Now, it would not be out of place to put PIMCO's warnings in context. The so called 'junk rated bonds' are actually corporate debt issued by even some large companies in Asia. Case in point in Bharti Airtel. The company is apparently the second largest issuer of junk rated bonds in US dollars. Given India's poor sovereign rating, Bharti's bond issuances are rated closer to 'junk'. Not that the company's fundamentals are in the pink of health. But the risk of investing is Bharti's bonds are as much as investing in the Treasury papers of some European economies we believe. Probably lesser! Hence, the ratings of debt and safety of bonds need to be put in context by investors rather than going by face value. Perceptions in these cases could be very faulty!

04:45
 
The Indian equity markets traded well below the dotted line throughout the day. At the time of writing, the BSE-Sensex was down by about 190 points or 1%. Barring stocks from the information technology space, all stocks were trading weak with those from the metal and realty spaces being the top underperformers. Stock markets in other major Asian economies ended on a weak note with Japan and China down by about 1.4% each.

04:56  Today's investing mantra
"Partly, it's habit. Partly, it's just that stocks mean business, and owning businesses is much more interesting than owning gold or farmland. Besides, stocks are probably still the best of all the poor alternatives in an era of inflation - at least they are if you buy in at appropriate prices." - Warren Buffett

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    7 Responses to "Is the fall in the rupee a short term concern?"

    AJ

    Jun 12, 2013

    Is our finance ministry trying to bridge the fiscal gap by allowing rupee to fall so that Government can earn some extra buck in customs duty on our major imports the oil. Plus Government can also earn some excise duty on the petroleum products plus various taxes. Therefore this purely not inaction from Government but also an active involvement from Government also so that Gold import also can be curbed and help smugglers so that the political machinery earns some buck also for their election funds.

    Like 

    parimal shah

    Jun 12, 2013

    If the government is hell-bent on food security bill (latest is ordinance route)the mistake will be disastrous for both CAD and fiscal deficit and the US dollar may cost upward of INR 66/-. This will also make the task of the next government (I have written off congress and UPA) extremely difficult since there will be no money in the treasury.
    I think even Gods have written off this government and the country. We need one special 2to5 year plan for proper implementation with vigilance - of all the laws and the schemes to clean up our act. Gods may then think about helping us because we are also trying
    to help ourseleves.

    Like 

    Economist

    Jun 11, 2013

    DROP INTEREST RATES!

    India's economic demise and the weakening rupee are ENTIRELY caused by sky high interest rates that have destroyed the Capital Asset Pricing Model, leading to a steep decline in investment and consumption.

    Most of Indian industry is in recession. Auto output is down by 25%.

    Let the socialists at the RBI will not drop interest rates in any meaningful manner! They caused this crisis.....without growth foreign money will stay away from India and the rupee will hit 65 to the dollar by Year end 2013......

    Like 

    Previn

    Jun 11, 2013

    It is the case in any country when the government had not used the natural resources in the right way. The common man is trying o protect by holding to the gold and the government is trying to curd the imports. Eventually the market will determine the true value and hence this decline is for long term unless our leaders try to fi the problem by using the resources for the benefit of people.

    Like 

    p. m. joseph

    Jun 11, 2013

    fall in the rupee is not a short term concern. it will continue unless the concerned authorities take stern action to curb flow of foreign currency out of india by various illegal methods. I shall quote one single example to highlight the loss of valuable FOREX. Lakhs of people trvel from India to varios foreign countries for various purposes.They carry crores of rupees worth foreign currencies legally and illegally. They are not asked to declare the forex they carry.If a declaration is asked for,illegal trasfer of foreign currency coud be curbed to a great extend. In my opinion got can save at least 10000 crores worth of foreign exchange.But the funniest part is that adlaration is asked when a person is coming to India from abroad.

    P M Joseph

    Like 

    heena

    Jun 11, 2013

    Where are our doctorate expert economists educated abroad and telling the country that what ever they said is told by God. Fools can not have full meals every day. You can not tell lie for ever to garner vote bank. The man who eat salt have to drink water.

    Like 

    Prabal Biswas

    Jun 11, 2013

    A short term rationing of petroleum products should be done. This could reduce the petrol bill. Also petroleum price should be raised. Increase every month by at least Rs 2 per liter. Well, what should have been done in 1950 is being done now. Why should the population who have received things every thing at dearth low prices accept such drastic change? Hard political decision. But, you only die once.

    Like 
      
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