Will the Rupee Recover? - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 24 December 2011
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Will the Rupee Recover? A  A  A

- By Asad Dossani, Author, The Lucrative Derivative Report

Asad Dossani
One of the major trends witnessed over the last few months has been the weakening of the rupee. The rupee started weakening in August and has since been on a steady decline. The decline has resulted in a fall of around 20%, very significant given the short space of time.

The weakening is very specific to the rupee. The rupee has performed worse than the euro, even though they are going through a debt crisis and likely recession next year. The rupee has also underperformed other emerging market nations, and underperformed most countries that have lower growth rates than India.

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In order to answer the question as to whether the rupee will recover, we will first understand why it has fallen to begin with. Then, we can determine whether those specific factors are likely to turn around.

So who exactly is involved in trading rupees with other foreign currencies? For a start, most Indian consumers do not. Retail investors can trade futures contracts on rupees, but cannot actually make spot transactions. Next, a certain portion of trade is by Indian companies that import and export goods; and thus need to transact in foreign currency. Foreign multinationals also trade currency.

The biggest players in the currency market are foreign investors that invest cash into Indian financial assets. Mostly, this refers to foreign portfolio investment in the Indian stock markets. The fall in the rupee is due largely to this group of investors that have decided to sell their Indian investments.

Thus, the rupee is likely to recover only when foreign investors decide they want to re-invest in Indian financial markets. To invest in the Indian stock market, they will need to buy rupees, and this will push up the currency's value. What this means is that whether the rupee strengthens or weakens is largely out of India's control.

Foreign investors have withdrawn funds for two reasons. First, India's economic image abroad has worsened in the last year. This is due to falling growth rates, numerous corruption scandals, and the inability of the government to implement meaningful reforms. This portion of course we do have some control over. An improvement in Indian economic fundamentals will encourage greater investment into the country and strengthen the rupee.

There is a second reason that foreign investors have withdrawn funds, and this is far more of an important factor. The economic problems taking place in Europe and America are causing investors from these countries to withdraw funds from riskier assets. As economic sentiment has worsened in Western countries, they are more likely to reduce their holdings of stock portfolio, particularly in emerging economies.

Thus, the rupee will recover when two factors are solved. First, it will be when India's economic image abroad improves. And second, it will be when economic growth and sentiment in Western countries improves. From a domestic policy perspective, we have some control over the first factor, and no control over the second factor.

One the whole, we probably have little control as to when the value of the rupee will recover. From a currency investor's point of view, it is good to lookout for improving market sentiment in Western countries as a cue to an improvement in the rupee's fortunes.

is a financial analyst and columnist. He actively trades his own and others' funds, investing primarily in currency, commodity, and stock index derivative products. Prior to this, he worked at Deutsche Bank as an analyst in the FX derivatives team. He is a graduate of the London School of Economics. Asad is a keen observer of macroeconomic trends and their effects on global financial markets. He is deeply passionate about educating investors, and encouraging individuals to take part in and profit from financial markets. To put it colloquially, he wishes to take Wall Street products and turn them into Main Street profits!

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13 Responses to "Will the Rupee Recover?"

sandhya

Dec 26, 2011

With due respect to all the views presented here, I think we should focus on something which would provide permanent solution to this problem. It is the reduction in Foreign Direct Investment (FDI). Our government has to take some tough stance and increase FDI limit in key sectors. This will go a long way in bringing in stable foreirgn exchange into our economy.

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narayan

Dec 26, 2011

Almost 80% of the foreign investments in India is through the FII and only 20% through FDI. so when economic sentiment here is worsening largely due to huge current account deficits,poor infrastructure, poor record of reforms implementation, coruption scandals etc, the hedge funds will pull back their investments which weaken the ruppee. I will not be surprised if the ruppee weakens to Rs 60 per dollar in the next one year even on a conservative basis.

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VIJI

Dec 26, 2011

GOOD ATTEMPT...,
BUT WHO ARE THESE FII 'S ?
ONE SURVEY SAYS /SHOWS 86.4 % SO CALLED FII 'S ARE NONE BUT FEW 'FAT' INDIANS OPERATING IN THE NAME(THRO') OF FOREIGN ENTITIES.
SO THE REAL OPERATORS ARE QUITE VISIBLE..., & 5 STATES ELECTIOS ARE ALSO JUST AHEAD...OK DEAR DOST DOSANI..?

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Sundar

Dec 25, 2011

Don't publish article like a leading business newspaper in India. Do you know how much money foreign investor's had taken away from Indian in the last 18 months. It is in the order of 4 to 5 Billion USD. This is peanut compared to the exit happened in 2008-2009.

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mahesh ganatra

Dec 25, 2011

If we look at the actual outflow on account of FII, it is not substantial. May be, the reason lies somewhere else.

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Shahrukh Vevaina

Dec 25, 2011

The Re definitely needs to be at a MINIMUM of Rs 44.50 to Rs 45, BASED ON FUNDAMENTALS. LET US SEE how the future unfolds!!!!

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Balakrishnan, R

Dec 25, 2011

All your views based on Foreign Investment. Fundamentally, we should try to earn the foreign exchange that we spend. We cannot depend solely on Foreign Investment to balance the deficit. Either we should try to earn the money we spend on imports through exports or we should reduce our imports to the extent of our exports so that there is a current account balance.

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Tikam Patni

Dec 25, 2011

Yes it will. After the forcoming elections when the Netas will transfer back the balance left for use again in 2014.

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arjun wadhiwa

Dec 25, 2011

Dear Mr.Dossani,
As per latest figures published in yesterday Business standard newspaper,FII's have net sold Rs3673 cr in equity,Rs 2253 cr. in Index derivates,Rs 1245 cr.in stocks derivates,all this in entire year 2011.All these total only rs 7171 cr USD(1434 mn @ Rs 5o to $).
This 1.4 bn USD is very insignificant to about USD 39 bn invested by them in India in 2009 + 2010.You may correct me if i am wrong.
How can 20 % fall be mainly on account of very insignificant withdrawl by FII.Does not sound convincing analysis.
Would appreciate enlightenment.
Thanks,
Arjun Wadhiwa.
Mumbai.

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Tikam Patni

Dec 25, 2011

You are forgetting the real reason. Every time elections are on the horizon, our Netas need the money here. At this time they bring back money parked abroad. To get maximum re for their foreign holdings, they keep re exchange rate high. RBI governor has to oblise to keep his job.
Once the elections are over, they will again park back the balance left. To get maximum dollars they will make sure to appreciate the Re. It is all Electocracy. Donot search for any economic reason.

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