Can we leave the rupee alone? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Can we leave the rupee alone? 

A  A  A
In this issue:
» India Inc. fed up with the government
» Yet another Asian crisis in the making?
» China to revisit 1998-like crisis?
» RBI norms boost banking stocks
» ...and more!

Will it settle close to 65? How soon will it touch 70? After share markets and gold, the rupee has become the most common topic of discussion amongst Indians. That every financial publication has been carrying an opinion on the rupee has also helped. India Inc. has been less bothered about its poor profitability in the past quarter. Rather it is busy passing on the blame to the government and the RBI for the fall of rupee. Needless to say, the otherwise lame duck government and the central bank are working overtime to stem the currency crisis. But each of the measures taken in the recent months seems to have done more harm than good! The currency controls, liquidity controls, curb on gold imports have all backfired. That brings us to the question - will it help to leave the rupee alone?

To answer that question, we need to reckon the downsides of a falling rupee. A higher rupee dollar rate will certainly mean fall in consumption, government spending and imports. Given that India is highly dependent on oil imports, it will also trigger inflation. Put together it could take the GDP growth to new lows. Also it could trigger a correction in asset classes like real estate.

Now, the measures taken by the government have hardly drawn more dollar denominated investments. Despite the over 6% gap between the yield on Indian 10-year government bonds and US Treasuries, the former has not had enough takers. The gap could shrink in the near future. Plus the hedging costs of the rupee investments hardly make them attractive enough for the foreign investor. And the Indian currency is not the only one getting hammered. The Brazilian real, the South African rand and the Indonesian rupiah are also under pressure, and for similar reasons. Thus it is anybody's guess how long will the measures have to continue to rescue the rupee from free fall. And if at all, will they succeed?

Choosing to leave the rupee alone is certainly a tough call for the government. More so, in the run up to the elections, when a downturn in economic variables can be disastrous. However, it seems this is the ideal opportunity for the government to shift its focus to reforms. As per Reuters Asia economics columnist Andy Mukherjee, reforms measures and policies that encourage exports and investment are a must have. They could be best long term sustainable measure for economic recovery. Thus despite the short term pains, leaving the rupee to find its level, could be India's best bet. But will the government lean in?

Do you think the government should shift focus away from the rupee and instead concentrate more on reforms? Please share your comments or post them on our Facebook page / Google+ page

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01:35  Chart of the day
The UPA government hardly has an impressive repertoire of legislations passed during its latest stint. But as per PRS Legislative Research report, published by Mint, the 15th Lok Sabha session saw fewer bills getting passed than in the previous two. Issues like Coal gate scam and onion prices have kept the Ministers on their toes. The result being that some key bills have remained in the back burner. Needless to say, this has already taken a toll on India's infrastructure, corporate investments and GDP. It remains to be seen how long the deadlock continues.

Source: Mint

The UPA government's inability to revive the Indian economy has become crystal clear. India Inc is now fed up with the government. An article in the Economic Times reports about the recent meeting of the Prime Minister's Council on Trade and Industry. It must be noted that the agenda of the meeting was to discuss ideas on how to revive growth. Apparently, five of the twenty corporate leaders did not show up for the meeting. The others who attended weren't too enthused. It's simple. If you have been harping about the same issues over and over again and if you see no change in the government's actions, one is bound to be frustrated. Corporates are losing confidence in the Indian economy. Their willingness in making investments has been abating.

Bajaj Auto Chairman Rahul Bajaj made a very valid point about the falling rupee and the high current account deficit. He emphasised that these were symptoms of the real underlying problem in the economy. And not the cause of the problem. He said the government was not doing enough to protect Indian interests against excessive dumping of consumer goods from China. While the US and Europe have taken steps to safeguard their domestic economies, India has not done enough.

Overall it seems that Indian corporates are losing their faith in the UPA government. With so many policy roadblocks, the government has failed to make any positive change in the business environment. If Indian corporates are getting weary of the government, we cannot have big expectations from foreign investors.

We believe it was the famed investor Jeremy Grantham who once said that we learn an enormous amount in the short term, quite a bit in the medium term and absolutely nothing in the long term. Those in doubt about this statement would do well to pick up a copy of the latest Financial Times. It highlights how Asia is all set to witness a repeat of the 1990s like crisis. Across the continent, countries have taken on debt to keep their economies moving along and this party could be about to come to an end. But as easy money from the West starts retreating, it may leave behind huge debris of wealth destruction.

It should be noted that in the aftermath of the 2008 crisis, most countries across Asia piled on debt to restart growth and prevent the economy from falling apart. Thus, rather than correcting the excesses, all that the debt did was shift the day of reckoning to a future date. Consequently, the structural reforms that were needed to bring economies back to a sustainable growth path were never carried out. And now, an even bigger crisis is staring them in the face. A trailer of this has already been witnessed in India where the currency is finding new lows every day. Sadly, the worse is yet to come we believe.

Deja vu. It is a French term which simply means a feeling that an instance has already occurred before. It seems that not just India, but even China is experiencing a deja vu kind of situation a now. Rewind back to 1998. Then there was a risk that China's economy might collapse. And this pretty much appears to be the situation now. Risk that many non-performing loans going bad is haunting the economy. Innovation has almost come to a standstill. Companies that used cheap capital during the credit boom are now posing to be a hindrance on growth. While the current Chinese Governor has taken steps to curtail credit growth, shadow banking has meant that credit boom has remained more or less intact. And this has meant that debt in the system has increased manifold. With demand slowing down many companies are now in a tight situation. This is a signal that the credit bubble might burst soon. While in 1998 the then Governor's bravado saved the economy it would be interesting to see whether the past prevails.

The Reserve Bank of India's (RBI) has finally come to the banking sector's rescue. The central bank has come up with norms that would ease the pressure on the banks' investment portfolios. One measure is to allow banks to shift some of their bonds to the HTM (Held to maturity) category. This is an accounting technique by which the banks would no longer be required to report mark to market losses on this part of the portfolio at least. The RBI has also allowed banks to retain their SLR holding in the HTM category at 24.5%. Earlier it had planned to reduce this percentage. So these measures would help the banks' bottom line to some extent albeit only because of accounting changes.

The bigger relief for the market is that RBI has announced measures to infuse more liquidity in the market. This should bode well for the corporate world which has seen its investment plans come under pressure due to the monetary tightening by RBI. But the question is whether these measures are sufficient to kick start the slowing investment cycle? We think not. The measures provided by RBI do come as a relief but the relief is only temporary. For long term relief the government still needs to remove the structural roadblocks. The RBI has done its job and is still doing it. Now it's time for the government to do the same

As volatility has marred the performances of various asset classes across the world, it is not too surprising that gold has also faced its share of fluctuations in price. The latest movement has been a decline of around 18% this year. This has been on the likelihood that the US Fed will withdraw its QE program soon. Indeed, gold has seen a tremendous rally in the past decade especially since the start of the financial crisis. Governments across the world chose to respond to the crisis by pumping in vast amounts of money into the system. With so much liquidity, the value of paper currencies had increasingly come into question. In such a situation, gold, which is a tangible asset and a store of value, had been finding a lot of takers. But now it is perceived that if the excess liquidity is sucked out, gold will lose its sheen. We for one do not believe that gold should be written off entirely. After all, it all depends on how easy it is for the Fed to exit its QE program. So far that has been the crutch on the basis of which markets were chugging along. The ground reality was different as fundamentals remained weak. Whether these fundamentals will improve drastically in the coming months remains highly suspect. In which case, the Fed might choose to stick to its loose monetary policy after all. All of this only suggests that some gold should find its way into the long term portfolios of investors.

After showing some signs of recovery in early hours, the key indices in Indian equity markets once again nosedived into the negative territory today. The BSE Sensex was trading lower by around 338 points at the time of writing. Key indices in Asia and Europe also closed lower today.

04:50  Today's investing mantra
"Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well." - Warren Buffet
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16 Responses to "Can we leave the rupee alone?"

sunil singh

Aug 31, 2013

Govt. have to control the imports that are coming from other countries, majorly china. they need to balance both import & export. Even the fund that have govt currently should be utilized in betterment.


Sushil Kumar Shukla

Aug 26, 2013

The govt should focus on concrete reform and the yields will automatically boost up the rupee.



Aug 25, 2013

there is a saying that prevention is better than cure, the govt. should have monitored its exports and imports and should have taken corrective steps then and there when any mismatch was observed. its too late now. corrective steps taken now would take much time to cope up with the situattion



Aug 23, 2013




Aug 21, 2013

aamdani 10 rupees and expenditure 5, five dollars in a pre-election year, way to go. Here is a brilliant solution of mine, shift ministers, mps, mlas, to decent accomodation no bigger than 10 downing street and sell it naah, auction it and raise india corpus fund to be run by iim _A,B,C,K,L,I folks......the latter will mismanage and loot the nation, as they are as alien to honesty as the residents of these luxurious,lavish bungalows, some of which are let out at regular periodicity for marrriages,birthdays, rave parties etc.Honesty is that one and only major subject which they do not teach in IITs,IIMs,Legislative Assemblies or Parliaments the world over. Its assumed that it is ingrained in the DNA but does it exist at a rate less than one in five, naaaaaaaaaah. Atleast five states would be prospering out of 30, kids are gonna blame these generations for ages......FIIs Bharat chhodon rupee mat todo...hai koi nichodh?


Ramesh Jaradhara

Aug 21, 2013

In my opinion Govt. should concentrate on reform measures instead of batting on cheap populist schemes. No haphazard populist schemes like 'Food security' can improve the health of the economy. Economy should be managed purely through econometrics. If Govt. deny economics, politics alone can not save the country.


Prof. K. C. Anand

Aug 21, 2013

I do not agree with the problem and the diagonosis. We have been importing substandard products wthout laying down the strict quality standard for the imported products. Take any electronic product, the warrunty is one year. The product goes bad usually after nine months, the user keeps on making replacements at regular intervals of 10 months. Imagine how much foreign exchange is wasted in allowing the substandard products. We have destroyed the inhouse production capability of slightly costlier products thereby leading to unemployment and destoying the local industries. No limits to Political Greed.


ronodeep das

Aug 21, 2013

the inevitable had to happen; the fiscal deficit, one of the highest in the world, current account deficit ie export/import ratio leading to bop crisis, policy inaction, corruption,disconnect with the industry and govt, over issues economic and social, have all contributed to the state of the indian rupee which has now gone into a free fall. rupee should seek its own level as determined by the market, any gross/part attempt by the govt to stem it will spoil it further. instead, the govt and the opposition should come together to course india out of this mess that has become, and offer some reprieve to the middle and the new middle class which is the real power of india and on whose strength the presiding govt has so long is about time that genuine reforms, policies,rewards, punishment are spelt out meaningfully and carried out with desired conviction, lest we become foreigners in our own land.



Aug 21, 2013

I am happy to see at last your comments on this article refers to the high dependency on oil. So, what is the solution ? Use our Indian Drilling companies for drilling and pay in rupees. Do our economists know how the oil is extracted? Please take them to the place of a oil well head; instead of scratching their head on taxes. This shall never solve the curency fall.
Also, news among NRI,s- people are not sending money to India temporarly and waiting for the rupee to fall further.
Please show our economists and our rulers to one of the railway station and show the mass crowd of population and ask them to implement some population control.
You as a media can write to them rather than leaving very few people to read these comments and just ignore.



Aug 21, 2013

I certainly agree with the view that Government should concentrate on reforms than meddling with economy.
Since independence,all the governments both at Centre and State have been deciding about the food to be taken,both type -Rice or wheat, its pricing and hundreds of various needs and wants,that too after 66 years of Independence and12 five year Plans. It is high time that those in power allow the matured citizens to earn their living and give wholehearted support policywise.

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