Should you be optimistic about the Indian rupee? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Should you be optimistic about the Indian rupee? 

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In this issue:
» India's household wealth dips to 2007-08 levels
» Keep away from speculating in this airline stock
» Did Bharti-Wal-Mart violate norms?
» The Iranian currency has tanked 70% since 2011
» ...and more!

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Since August 2011, the Indian rupee has been on a roller coaster ride. It kept declining continuously, hitting an all time low of Rs 57 against the US dollar in June 2012. Many expected the rupee to dip as low as Rs 60 per US dollar.

However, in a turn of events, the rupee reversed direction in September 2012 and now stands at Rs 52.65 per US dollar. The sentiment has suddenly changed and many expect the rupee to reach Rs 50 or below per dollar.

Let us see what changed over the last one month. On the international front, the US Fed, the European Central Bank (ECB) and the Bank of Japan announced fresh rounds of quantitative easing. On the domestic front, announcements of some economic reforms lifted sentiment on the Indian economy. Some of the reform measures included a hike in diesel prices, and allowing more FDI in sectors such as multi-brand retail, insurance, pension and aviation.

Are these reasons good enough to warrant a change in sentiment from pessimism to optimism? Have India's economic fundamentals changed so quickly? An article in Firstpost tries to answer this question. Firstly, it's important to remember that currency movements in the short to medium term are not driven purely by fundamental factors. Just like stock markets, currencies are vulnerable to speculation. In that sense, one must not try to read too much into currency fluctuations over a short term.

Next, let's consider the fundamentals of the Indian economy. Despite the change of sentiment following the reform announcements, the prospects of the Indian economy continue to remain bleak. India's GDP is estimated to grow by less than 6% in 2012-13. In fact, the IMF has pegged its growth estimates at 4.9%. The recent fiscal measures are unlikely to stop the fiscal deficit from exceeding the budgeted 5.1% of GDP. Both IIP (index of industrial production) and exports growth have been negative during most part of the current fiscal. India's current account deficit as of June 2012 stood tall at 3.9% of GDP. The article also notes that our foreign exchange reserves too haven't changed much over the last six months.

So, where is the Indian rupee headed? Well, it would be a futile attempt to guess the direction of the currency. But the more important thing to understand is that not much, other than sentiment, has changed in the Indian economy in recent times. It is important to keep in mind that over the long term, the Indian rupee has declined on an average by about 2% per annum. As such, we believe that unless India achieves a sustainable trade surplus and consistent FDI inflows, this trend may not change.

Do you know think the Indian rupee could again go below Rs 50 per US dollar? Let us know your comments or post them on our Facebook page / Google+ page

01:30  Chart of the day
As per a news article in Business Line, a recent report by research agency Credit Suisse has reported that the total net wealth of Indian households declined by 18% year-on-year (YoY) from US$ 3.89 trillion in mid-2011 to US$ 3.19 trillion in mid-2012. This has been one of the sharpest declines compared to several other regions in the world. This takes India's total net wealth to levels achieved prior the financial crisis of 2007-08. One of the main reasons for the steep decline has been the 20% depreciation in the value of the Indian rupee against the US dollar during the period. During the same period, the global household wealth declined by 5.2% to US$ 223 trillion. It must be noted that this is the first annual decline since 2007-08. However, if one assumes the exchange rates to be constant during the period, the aggregate global household wealth would have been higher by 1% YoY.

Data source: Business Line

First the company defaulted on bank loans. Then, it failed to keep its commitment on payment of staff salaries. Later it kept its flight operations on despite compromise on passenger safety. Meanwhile, its stock has been oscillating dangerously. However, neither the government, nor the DGCA nor the SEBI has been prompt enough in grounding Kingfisher Airlines.

Problems for the aviation company have been in the media for almost a year now. All this while, the financial problems of the company have only multiplied. The management has shown no reasonable attempt or vision to sort them out either. Thus, there seems to be little logical reasoning for investor interest in the stock. Speculators, however, have not rubbed their hands off the stock of Kingfisher. As per Firstpost, rumours regarding sale of stake in United Spirits to Diageo have added to the volatility of the stock. It is only recently that stock exchanges imposed a narrower circuit filter on it. With regulators taking their own time to react to such dangerous situations, it is for investors to be wary of speculative trends.

FDI in multi-brand retail was approved just a few weeks ago. But an older deal has come under the radar of the government. As per Business Standard, it dates back to 2010 when US retail giant Wal-Mart joined hands with the Bharti group. As per the daily, the venture has come under criticism as a Member of Parliament has alleged that the venture amounted to FDI in multi brand retail. Since this was not permitted in 2010, therefore, the deal constitutes a violation. The newspaper further states that Prime Minister's Office (PMO) has asked the Department of Industrial Policy and Promotion (DIPP) to investigate into the deal. DIPP claims that such a probe is not under its jurisdiction.

While the war for judicial territory may continue, the deal in itself has come under trouble. On one hand, the company denies any wrong doing and states that they were well within the provisions of the law. On the other hand the MP states that they were not. The thing is that Walmart had invested Rs 4.56 bn through compulsory convertible debentures which is a form of FDI. The total capital raised by the venture was Rs 8.99 bn. On the face of it, it may appear that the deal violated the law prevailing at that time. But the thing is who was responsible for approving it? Naturally, it has to be one of the regulatory bodies. Therefore, DIPP may not be wrong in denying jurisdiction on the same. If the judicial regulator who approved the deal is ascertained and it is concluded that the deal did violate the law, it would be yet another misgiving on the part of the government and its regulatory bodies.

For those of us not much into economics, Zimbabwe is nothing but a cricket team that has seen its fortunes go from bad to worse. To the rest of the world though, the name conjures up images of hyperinflation. In fact, Zimbabwe's hyper inflation was so bad that it is believed to have peaked to 6.5 sextillion percent once in 2008. Well, sextillion is a one followed by 21 zeroes!

Barely few years into the incident and we could well be witness to another episode of hyperinflation. As per reports, the Iranian currency of Rial is certainly struggling to keep its value from falling. It has fallen an astounding 25% in just one week. And if you consider the trend since the beginning of 2011, it is off by some 70 odd percent. Of course, the devaluation is way off from Zimbabwean levels, but is still a significant devaluation nevertheless. What more, it may continue to worsen from the current levels. But why have things come to such a pass? Well, a big part of the reason is sanctions imposed by US and Europe on the county's trade dealings. Also responsible for the mess is the mismanagement of the Iranian economy by its own leaders we believe.

The western nations are hoping that the currency collapse could eventually lead people to rebel and thus, overthrow the current anti-western regime. While this will no doubt bring peace to the region and could also result in a decline in oil prices, we are not sure whether this is the right way of bringing about the change so desired. From the perspective of impact on financial markets though, a regime change in Iran is certainly good news for investors we believe. But it is too uncertain and perhaps too far off to be factored into any sort of calculations just yet.

In the meanwhile, the Indian equity markets opened on a weak note and recovered a bit before falling further into the negative zone. At the time of writing, BSE Sensex was down by 103 points (0.5%). Among the sectoral indices, IT and capital goods stocks were the top losers. Infosys in particular was down by 5% after posting the numbers for the second quarter of FY 13. Asian stock markets traded mixed with Hong Kong as the top gainer and Taiwan as the top loser.

04:40  Today's Investing Mantra
"If we owned a copper-mining company in its entirely, we'd base compensation on costs of production, which management has control over, rather than things based on market prices, which they don't control. Costs won't fluctuate a lot. Compensation should tie to what is under the control of management. Try to understand what management can have impact on." - Warren Buffett

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    2 Responses to "Should you be optimistic about the Indian rupee?"


    Oct 13, 2012

    I wonder how USA is surviving with current account deficit running into trillions of dollars with a huge fiscal deficit to boot. For years together their annual budget has not been balanced what with huge money printing going on for twelve years running now.Their currency is propped up by other countries who use this hard currency for dealings in oil and other major trade dealings. So in a way the external value of our rupee is purely artificial. It does not reflect its true worth. The obsession of the West with Iran and hounding their economy is going to recoil on them. Iran is populated by the modest shia muslims who are way above tolerant of other faiths than the irrepressible sunnis.



    Oct 13, 2012

    Let us not forget that printing unlimited quantities of currency and keeping interest rates at almost zero is what the US and now Europe are doing.There is no fundamental strength in these currencies except that they are international. If economies of developed countries deteriorate further and Indian economy recovers as it is more domestic coupled with a fall in oil price, Indian rupee cab go upto Rs.50 as its fall of around 27% was sudden. One should calculate your 2% annual fall on the pre fall value of rupee and not post fall. As Mr. Chidambaram says, rupee should go to Rs.50. But will it ? That is still a billion dollar question but with Yuan rising , it is very much possible.

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