Will rupee remain in the senior citizens' club? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Will rupee remain in the senior citizens' club? 

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In this issue:
» The policy disasters responsible for our economic slowdown
» Is it time to sell gold?
» US economy headed for another recession?
» A new bubble in the US
» and more....

The week that went by saw the Indian Rupee come under pressure all over again. Just the week before this, the Reserve Bank of India (RBI) had taken several steps to lend support to the Rupee. It sucked out the short term liquidity from the system and indirectly raised the short term rates. It decided to leave all the benchmark rates unchanged during its monetary policy review. The Finance Minister too decided to lend a helping hand. He came up with press conferences reassuring the world that the economic condition of India was not as bad as what people were making it out to be. All this to help the falling rupee. But the currency continued its journey downwards to hit a new low.

Unfortunately the near term outlook for the currency is looking gloomier. As per the Economic Times, speculators expect the rupee to dip towards the Rs 65-66 levels. This is of course just speculation but the problem is that most of the investors (foreign and domestic) seem to agree with these levels. The reason - India's economic problems and more importantly its government.

The country is burdened with a heavy deficit problem. The current account deficit has expanded to historic highs. And the government does not seem to be in too much of a hurry to implement the structural reforms necessary to bring the deficits under control. Despite the numerous assurances being given by the government on the deficit control front; it still seems to be reluctant when it comes to making the bold decisive moves. Why? Probably because of the upcoming general elections. The last thing the UPA government wants is to lose votes.

In the meantime the Rupee is expected to continue sizzling. And this adds to the woes of the common man. How? Because of the price of oil and related products and services. You see India is a big importer of oil. If the rupee depreciates, the rupee value of imported oil soars upwards. And this means the cost of petrol, diesel, etc would go up as well. The recent spate of fuel price hikes is testimony to this. So if oil prices are increased, it means that everything that depends on oil as an essential input, would also see its prices go up. For example if fuel prices go up, then cost of transportation increases and this means that the cost of transported goods goes up. This in turn would mean increased costs of even basic items like grains, vegetables, fruits, etc.

So if rupee continues to remain depressed, it means that higher inflation would burn a hole in our pockets. At the same time it would keep the RBI under pressure to keep interest rates at higher levels. This in turn would hurt the economic activity and investments in the country. Needless to say, that would give a negative signal to investors. In turn adding further pressure on the rupee. Net result - the rupee is in a vicious cycle and we are stuck in the middle of it. Wonder if it will stay this way until the elections next year!

Do you think the rupee can recover from the existing levels or is Rs 60 or lower the new norm for it? Please share your comments or post them on our Facebook page / Google+ page

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01:10  Chart of the day
Warren Buffett is a fan of brands. In his opinion, a strong brand can provide a solid safety moat for a company. And his preference for brands makes sense. Companies with a strong brand are able to earn returns well above their cost of capital. That too year after year for a long period of time. This brings us to the question as to which companies have strong brands in India. As per the data of Interbrand carried by Financial Express, the top 5 brands in terms of brand values are - the Tatas Group, Reliance, Bharti Airtel, State Bank of India (SBI) and Infosys. While these companies/groups may rank high in terms of brand value; however, investors must remember that this is just one criterion to look at while considering a company for an investment. They still need to dig deeper into things like fundamentals, corporate governance, valuations, etc before arriving at an investment decision.

Data Source: Financial Express

Deflection. An art that the Indian policymakers seemed to have become experts at. Point out any problem with respect to the economy to them and they very astutely put the blame on anything but themselves. Point out the falling rupee and they paint gold as the villain. Point out the poor trade flow and the blame goes to slowdown in the western world. And who's responsible for the economic mess we find ourselves in? Well, it's the RBI they reckon for it just doesn't lower interest rates.

We believe it is time for some reality check. The policymakers need to know that a large part of the problem is of their own making. And it isn't that this train wreck has hit us all of a sudden. Some experts have been seeing this writing on the wall for quite some time now and had even warned the Government about it. But we guess they were too busy doling out freebies. And also basking in the glory of India's high economic growth which in hindsight was a result of cheap liquidity and had no strong legs to it.

To give you an idea, the fiscal deficit that we had so painstakingly brought down to 4% in FY08 from 10% in FY03 was squandered away in just one year as pointed out by a leading daily. Not just that. Most of the extra expenses were of the nature that made their pullback in future years extremely difficult. Then there is the total overlooking of the manufacturing sector which has now come back to haunt us. Examples like this are dime a dozen. All we want to say is it is high time policymakers come out of their denial and start taking steps so that we don't plunge into an even bigger crisis. Easier said than done in an election year we believe.

Gold. Should one continue to hold? Or should one book profits and look at other safer avenues? These are the some of the questions that are in debate at regular intervals. Yes! Gold has had a strong run over the past decade. Reasons for the same have been the depreciating US dollar against the world over the long period. Also, the high commodity prices made the yellow metal a better hedge against inflation for a long time. The fact of the matter is that the world is printing a lot of money right now. With more money running after limited amount of resources, inflation levels are bound to rise across the world in over time. As and when QE measures begin to ease across world, the pressure on economies dependent on easy, cheap money, will rise. So to answer the key question - should one book profits on gold? We don't think so! An exposure of 5-10% of one's portfolio is necessary. While the metal may not rise as strongly as it has over the past decade, with the amount of uncertainty the world is seeing, it is still an insurance policy to protect your portfolios. As such, one could say that this bet could provide stability to one's portfolio.

The future of the global economy is intricately tied to the fortunes of the largest economy, that is, the US. It is still not clear which way the economy is headed. There are those who believe the economy is on a path to recovery. Then there are those who think the future of the US economy is going to be troubled.

We came across an article in Money News that belongs to the latter club. A gentleman named David Levy, chairman of the Jerome Levy Forecasting Center believes the US will eventually fall into recession. But isn't the economy showing signs of recovery? As per Mr Levy, there is way too much debt relative to income. The household debt-to-income ratio currently stands around 104%. This is lower than the peak of 128%. But only when it goes below 80% can one say that the economy is in decent shape. Further, he also says that the political decisions in Washington, Europe and China will play a decisive role in whether the US faces recession.

We do share the gentleman's sombre outlook on the US economy. Plain old common sense says that any economy that is loaded with excessive debt is bound to have grave problems. It is only a question of when.

In his column The Daily Reckoning, Bill Bonner had pointed out at the next bubble-in-the-making in the US was education loans. He explained how loans worth over US$ 1 trillion were about to hit the bubble territory. What was more alarming was that interest on student loans was to rise to 6.8% from their 3.4% base. Thus at a time when the Fed is busy printing cheap money, student loans are getting increasingly unaffordable. It seems the problem of student loans is set to get much bigger than any American has ever anticipated!

As per Business Insider, the problem of education loans is no longer restricted to college goers. On the contrary, in New York city, even pre schooling and day care has become so expensive that loans are being offered to parents to fund the same! While the idea may seem ridiculous to us, it seems most parents are finding this the only viable way to send their wards to private schools. This is because the slots in public schools are grossly insufficient. The story does not end there. In order to qualify for the loans, families must earn between US$ 80,000 and US$ 200,000 per year and have a good credit score. Now, neither job prospects nor income levels in the US are getting any better. Thus, the problem of education loans is expected to come haunting American families.

Barring Brazil (up 2.9%) and China (up 1.1%), majority of the global stock markets ended the week in the red with stock markets in Japan (down 5.9%) and India (down 2.0%) leading the losses.

The stock markets in US were down by 1.5% with investors pulling back on chances of Federal Reserve scaling back the stimulus programme. The Fed officials have indicated a cut down in the bond purchase programme if the economy progresses as expected. The dollar at the same time has shown a rebound from seven week low.

The stock markets in China ended the week with gains on account of positive economic data that eased investors' concerns to some extent. The European stock markets ended the week on a mixed note. The stock markets in France gained 0.8% over the week despite a downbeat data on industrial production. The gains in the European stock markets were also on the back of positive data on Chinese economy.

The Indian stock markets closed the week on a negative note. The BSE Sensex was down by 2.0% at the end of the week as compared to last week. This was mainly on account of worries over tapering down of US stimulus, the country's record current account deficit and rupee touching new lows against the dollar. The rupee now stands at 60.86 against the dollar. Besides, the stock market performance was impacted by the earnings announcements.

Data Source: Yahoo Finance

04:55  Weekend investing mantra
"I deal in facts, not forecasting the future. That's crystal ball stuff. That doesn't work."- Peter Lynch
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10 Responses to "Will rupee remain in the senior citizens' club?"


Aug 23, 2013

The macro issues plaguing India cannot be solved quickly. The ineffective coalition govt and the compulsions to adopt populist measures like even the food bill when we are close to general elections do not bode well for tough measures.

Thus the Rupee will hover around 65 as the new norm for some time before a more powerful and effective govt comes to power - even this looks difficult going by the recent opinion polls.


Ramesh chandra jain

Aug 16, 2013

Govt. have to take immediate action other wise the 67th anniversary will made the dollar also@67 because indirectly USA not ready to give up top slot.our top economists are also trapped in the net of USA.Request to work on our first thought avoid the corruption in thought
Vande mataram
more more such thought of Review and Evaluation vist my facebook page Honey REorganizer



Aug 12, 2013

Rupee can be made strong only if we increase our exports, or we trade with those countries who agree for exchange of goods like barter system. Other methods just look like killing time.


suresh chander tyagi

Aug 11, 2013

All round developments indicate that the govt of india does not have will power to strenthen the rupee as they are only interested in their chair & will go to any extend to damage the economy to win the 2014 elections. In my openion the Rupee will further weaken and stabilise around 64.


Dr Anil k Kothari

Aug 10, 2013

Indian corporate sector has found novel ways of raising ,money and than dumped the investors due to loopholes in the system. Kinkfisher,and deccan chronicle are glaring example of how 12,000 crore worth of Banks Moneys has been lost but nobody has been arrested neither the bank officials or the promotors. Now two more companys are on the same path INDSwift group and Birla power solutions. Both manipulated the results and raised huhe amount through public deposits from public at attractive interest rates. Now indswift group has filed in the company law board to repay the deposits in 7 years (newspaper ad on 25 th July)@ 6% I asked a simple question why company law board and MCA takes action against such companies. Birla power is also not refunding Public deposits. If no action is taken many more companies will follow the same route and the poor depositer will die because their are some pensioners, widows, parents who saved for education marriage etc. I request that all readers should presserise the govt that the policy of wealthy promoters and bankcourrpt companies should end.


Dr Anil k Kothari

Aug 10, 2013

The politicians are busy doling taxpayers money without understanding the implications of it on economy. Mnerega and food security bill may be good for votes but bad for economy. The exit of Posco and Mittal on face appears that they are leaving because of delay but my own sources says that in future their will be trouble finding cheap labour in india. The manufacturing sector is already complaining that manpower is not available and hence they are becoming traders instead of manufacturing. We have imported Fans worth of 35000 Crore, Electronic goods worth more than 1,00,000 crore Even our power plants are being imported from china look at the valuations of BHEL EIL etc. To fill the CAD govt is planning to sell equities of PSUs when prices are historically low ( I feel some Golmal in this. Cant we reduce the cost of governance. We should increase the productvity by introducing six days week in Govt Sector reduce the no of holidays and initiate skill development for youth insted of Narega nad food security.



Aug 10, 2013

We have PM who actually does not know how many paise in a rupee and how much contributes for what. Off course he do not have time even to look to the national security concern. we have seen in TV some body questioned in the parliament that which country he is the PM. Also this had been supported by anti national elements like Mulayam, lalu, and Maya.

Like (2)

Ganapathy Sastri

Aug 10, 2013

The culprit in INR falling to record lows is the MASSIVE Trade Deficit that we have been having during the last several years. Since independence there is not a single year when India has had a trade surplus. Compare that with China or several far east countries which have run trade surpluses for several decades. Responsibility for the massive trade deficit ( now over $200B compared to $6 B in 1991 when India was nearly bankrupt) is with EVERY INDIAN and not just Finance Minister or RBI. We need to find ways to improve productivity ( not just talk time on mobile phones), cut labour costs, cut overall costs and become a low cost producer. Also need to remember the MASSIVE inflation we have been having during last five years. Prices have more than doubled. Even at 12% interst, one earns NEGATIVE real income. So it is no use blaming RBI for not bringing down interest rates as that would have only increased inflation. We have serious issues to overcome in the next few years. We need to put our collective heads together to come out of the issues that can overwhelm us.

Like (2)

Shamal Parab

Aug 10, 2013

According to me, Govt and people of India should not get worried about Rupee depreciation much. Govt. should focus on its policies and attracting new investments in the country. Govt, should also focus on controlling BOP and inflation. If there is an economic growth, Rupee will automatically appreciate on its own.

Like (2)

J Thomas

Aug 10, 2013

The main reason for inflation is deficit financing. The people who vote outnumber those who work. So the government will continue with deficit financing.

And, as long as we have inflation, the rupee will depreciate against international currencies.

A rupee today is worth only one paisa of my childhood. The government has inflated away 99 paise.

Like (2)
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