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Down goes the rupee

Mar 4, 2009

Rupee's free fall
The rupee has had a rough ride so far and the deepening global financial crisis has only accelerated its fall. The rupee yesterday hit a low of 52 per US dollar as the weak stock markets and fears of capital outflows took centrestage. FIIs, who had contributed to the blazing journey of the BSE-Sensex to 21,000 levels, have been pulling out money from Indian equities in droves ever since the crisis erupted. Besides this, the deteriorating fiscal deficit has been another reason that has exerted considerable pressure on the Indian currency in the past one year. Thus, a deadly cocktail of unenthusing economic data, importers buying dollars in anticipation of further weakness and declining stock markets have been taking their toll on the rupee. Interestingly, another phenomenon that is being witnessed is that exporters are cancelling orders when the rupee was much stronger, thereby spurring the demand for dollars and contributing to the fall in the rupee. Obviously, those companies who rely heavily on imports and have large amount of foreign currency debt on their books will find themselves receiving the short end of the stick.

JP Morgan emerges unscathed
While most of the global banks are reeling under the losses suffered as fallout of the subprime crisis, JP Morgan in this bleak environment has something to cheer about. As reported on Bloomberg, the bank managed to generate US$ 5 bn in profits during the worst year in Wall Street history by trading over-the-counter fixed-income derivatives. JP Morgan, which is the largest US bank by market value had reported a total profit of US$ 5.6 bn, which is commendable given that many of its peers were deep in the red.

One of the reasons attributed to the same was that after the debacle of many investment banks, there were less trading partners to deal with in the derivatives markets. Thus, JP Morgan could capitalise on this opportunity as it was also able to enjoy better pricing power. But more important than that, it was probably their focus on quality that yielded the desired results. Whatever be the case, the bank is certain to be the envy of its beleaguered peers.

Standing by Corus
The Tata Group has had its mettle tested in the past one year what with terrorist attacks, expensive acquisitions and land disputes taking their toll on the companies' performance. One of these massive acquisitions was that of Corus which was taken over by Tata Steel for US$ 12 bn in 2006. Since then many have questioned the logic of this deal citing it as too expensive. The fact that the global economy has been deteriorating has only further compounded problems.

In fact, Corus has been eating into the profits of Tata Steel on a consolidated basis and this was amply demonstrated during 9mFY09, wherein EBDITA margins for Tata Steel on a consolidated basis stood at 15%, a far cry from the 43% margins posted by the company on a standalone basis.

Despite this, Tata Steel continues to stand by Corus and the MD Mr. Muthuraman has reiterated that Corus has been a good buy as the latter's fundamentals are sound. He further went on to add that Corus' poor show was nothing to do with its fundamentals and that it has been a victim of the meltdown in the global economy just like many global steel players. While high administrative and staff costs and absence of raw material security have hampered performance, the silver lining in the cloud has been the geographical diversity, good product mix and skilled expertise that Corus has lent to Tata Steel. Eventually, Corus may start contributing to Tata Steel's overall performance, but for the time being the pressure persists.

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