The Rupee History

The Indian rupee, which was at par with the American currency at the time of independence in 1947, hit a record low of 63.30 against a dollar Monday. This means the Indian currency has depreciated by more than 63 times against the greenback in the past 66 years.

Managing volatility in the currency markets has become a big challenge for the economic policy makers in the country. The central bank as well as the government has taken a series of measures to curb the volatility in the markets.

The Indian currency has witnessed a roller-coaster journey since independence. Many geopolitical and economic developments have affected its movement in the last 66 years. Here is a broader look at the Indian rupee's journey since 1947:

·         1947 – Indian Rupee was at par with American dollar. No foreign borrowings on the India’s balance sheet.

·         1951 – Devaluation of money as a result of external borrowing for welfare and developmental activities.

·         1948-1966 – Fixed rate currency regime. Rupee pegged at 4.79 against dollar.

·         1962 and 1965 – Wars with China and Pakistan respectively impacted the deficit adversely. Rupee devalued to 7.57 against 1 dollar.

·         1971 – Rupee’s link with British currency broken.

·         1975 – The rupee linked to US dollar, Japanese yen and German mark. Rupee valued at 8.39 against the dollar.

·         1985 – Rupee further devalued to 12 against a dollar.

·         1991 – Balance of payment crisis. The foreign reserves were not even worth to meet three weeks of imports. The currency was devalued to 17.90 against a dollar.

·         1993 – The currency was let free to flow with the market sentiments. The exchange rate was freed to be determined by the market. One was required to pay Rs.31.37 to get a dollar.

·         2000-2010 – The rupee traded in the range of 40-50 against the dollar.

The Indian currency hit a record low of 63.30 against a dollar Monday, surpassing its previous record low of 62.03 hit on Aug 16.

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Our India, Our Finance, Our Deficit

A large fiscal deficit is an indication that the economy is in trouble and will have reasons to worry. A high fiscal deficit, amongst many, could pose an 

• inflation risk
• minimize the growth of the economy
• doubt the government’s abilities
• it could affect the country’s sovereign rating, which in turn will limit foreign investors from looking at India as one of the investment hubs.

It is believed that high fiscal deficit can be corrected. For example, if the government could not control its expenditures, it could raise taxes to cover up for the extra amount of money spent. When taxes increase, consumers will involuntarily have to cut down on their expenditure to pay the government.
Also, the government expenditure puts pressure on interest rates creating a negative impact on savings. And yes, the Indian government can choose to import money into the country to balance the soaring fiscal deficit, but this move could appreciate the country’s currency and the government will have to pay interest on its borrowings, eventually increasing the deficit and affect the country’s economic growth. Therefore, delay in adjusting high fiscal deficit shows that the government cannot control its finances properly.
Did you know that several government projects are stalled because of high fiscal deficit? Here’s why. When a country labors under high fiscal deficit, it limits the government’s spending capacity and this has an effect on the continuous funds various projects need. Infrastructure projects, or welfare policies, or education and healthcare projects, for example.
The trouble with high fiscal deficit is that it leads to higher interest rates, disturbing the entire economy. Since the government is not earning much, it will have to restrict its expenses, unless it chooses to borrow. And since the government abilities are doubted idue to its incapacity to control its profligacy, it is very difficult for the government to access loans. And even if it gets loans, they are at given at high interest rates. On the one hand, the government borrows because it does not have enough money, and on the other hand, it has to pay more for borrowing money. Hence, fiscal deficit leads to a slow progress of the nation and slow progress of its people.

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External Sector Vulnerability - The Indian Economy

In the past few years, since the 2008 global financial crisis, India's external sector has become increasingly vulnerable. The plunge taken by the Indian rupee recently is an effect of this perception of an increase in vulnerability.
About External Debt
External debt is the portion of its debt borrowed from foreign institutions. India's external debt has seen a stark rise in the last six years. According to data by the Reserve Bank of India, India's external debt stood at $390 billion as of March 2013, up 12.9% from $344.6 billion seen in March 2012. This amounts to 21.2% of the Gross Domestic Product (GDP) - used to measure growth.
This composes of various bonds (like FCCBs) and borrowing (like ECBs). An inability to pay off its external debt may spark a crisis. So far, India has been financing its debt by a surplus in foreign fund inflows. In the event of an unavailability of such capital flows, the country then turns to its foreign exchange reserves to finance its debt repayment.
Why has it shot up?
A number of reasons have contributed to this rise. According to an assessment by the Reserve Bank of India, the increase in the total external debt in 2012-13 was primarily due to a rise in short-term trade credit. This means businesses are borrowing overseas due to near-zero interest rates prevailing in those markets. In India, interest rates are far too high. Besides this, many non-resident Indians are buying short-term Indian deposits to take advantage of interest rate differential in India and outside India. The widening of trade deficit - the net difference in imports and exports - on account of a higher import bill has also caused a rise in external debt. A depreciation in rupee has made debt costlier as it must be paid back in the same currency it was loaned in.
Impact
A rise in external debt - especially short-term debt - increases a country's vulnerability to capital inflows. This is even more risky now as the US Federal Reserve has indicated a withdrawal of its bond-buying program, which had led to influx of foreign funds into emerging markets like India. Foreign investors have thus moved their funds out of emerging markets, thus resulting in a net outflow of funds. Financing would be a challenge in India. This will in turn put pressure on its forex reserves, which are now at its lowest levels since 1997.
At a time when the rupee has depreciated to its all-time low against the dollar, the RBI needs sufficient forex reserves to stem the free-fall. A rise in debt, thus, puts pressure on the rupee too.

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The Myth Surrounding Safe Investments

Financial media tends to re-define 'safety' of asset classes every time there is a change in market sentiment. Prior to the financial crisis of 2008, even derivatives were sold as safe investments. Ironically the weapons of mass destruction have only made the case for so-called safe investments stronger. So much so, that post crisis, the adage of safety shifted from smallcap stocks to gold to finally debt funds. Many Indian investors who managed to sail through the crisis of 2008 lost their shirt betting on risky smallcaps. Gold then became the favourite asset class endorsed by financial media and banks alike. Once the sterling rise in gold prices halted and government cracked down on gold buying, even the yellow metal lost its luster. 

The street then shifted focus to debt funds. Until last month every major financial daily propagated the wisdom of putting tons of money in 'safe' debt funds. Banks too were happy to tie up with mutual funds to propagate the safety of their debt funds. All they had to do was convince prospective investors that the RBI's move in the next monetary policy was a 'rate cut'. After all with the Finance Ministry breathing down its throat, the Reserve Bank of India (RBI) had little option! Reducing interest rates would be the most certain way to push GDP growth rates higher. And the cut in interest rates would be a blessing in disguise for the debt funds. Given the inverse relation between interest rates and bond prices, investors would not just keep their money 'safe' but also reap rich gains in a short time. 

The promise of 'safety' and quick returns worked wonders for debt funds. Even while equity mutual funds saw lumpsum redemption, inflows into debt funds touched record highs. Brokers and advisors even convinced their clients to shift money from long term equity funds to short term debt funds. The dream run lasted only until the RBI's sudden rate hike caught both mutual funds and investors unawares. In its typical style the RBI chose to curb liquidity to stem the rupee's fall against the US dollar. The concern over higher rates impacting near term growth is not on the central bank's mind. Once again the RBI indirectly hiked the cash reserve ratio (CRR) for banks. These measures took the 'safety' quotient of debt funds to new lows. Investors who had been lured into them painfully realized that no investment is 'safe' if the underlying rationale is speculation as against fundamentals. Also those who chose to shift funds from long term equities did so at their own peril.
We wonder if investors would finally start evaluating riskiness of asset classes more carefully. 

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Swinging Rupee – Enjoy the breeze or get blown!!

The Headline catches the meaning of the content but a small difference lies. Unlike the swings, we are witnessing only the fall and not only us but the whole world needs a push on the ground to rise higher.

It’s important to understand that the studies of Rupee vs Dollars or for that matter between any currencies would give similar results. Focusing on tweaking the ways of analysis is not going to work. Moving onto recent events, the Fed sneezed and the whole world caught the cold.

We wasted no time in blaming Fed chief Ben Bernanke on his stance to reduce money supple to world economy. A deeper thought reveals that this was always expected and since the 2008 banking crash hints were in the air. All the developed nations (US, UK and even ECB) tried to maintain interest rates as low as possible. The easiest way for the traders then becomes to allot your money to the emerging markets and now as the cash under hand reduces, worries start to build up. The Fed is now focusing on no more monetary easing as the results have been far slower than expected. The rupee getting hurt by this phenomenon as easy money has reduced.

The gyration of rupee has been huge in the last one year. It has swung to and fro from 48.61 to 57.33 to the US dollar. Small Investors are feeling the heat. More than 5,000 tons of lentils from Canada are stuck in the port of Tuticorin in south India’s Tamil Nadu state as importers have defaulted on payments following the rupee’s decline. A nearly 10% decline of Rupee since May has hit these small businessmen on the face, mounting to the fact that most have not hedged against the currency risks.

The haze of complexities are wiped of as the easing which was supposed to bail the world economy out of the 2008 crisis has become the core issue to deal with. On scratching the iceberg one gets his attention towards Europe as austerity measures taken up by Angela Merkel further pushed the dying economies of Europe into further dire straits. From 2008 (banking crisis) to 2011 (US debt downgrade) to European sovereign debt crisis and finally the recent cut down on bond buying by Fed, rupee has suffered a charismatic slide. India lacks here in having any recovery policy – which sadly is absent. Be it UK policy of austerity or Japan’s measure to provide easy money, policies need to be narrowed down and implemented. It’s evident that the volatility is here to stay. It’s evident that at least now we have to improve fundamentals. Its evident playing with rates and cash supplies is temporary solutions which collate to bigger future problems.

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Morning Bell: May 29, 2013

Key Indian indices are set to open on a soft note today tracking volatile cues from other Asian markets. Back home, caution ahead of Q4 GDP data due on 31st May 2013 & derivative contract expiry may infuse volatility in the market.


Key Events For The Day:

Quarterly Results: ONGC, Tata Motors, NMDC, Cipla.

India M3 Money Supply.

Canada BoC Interest Rate Decision.


Derivative Strategy For The Day:

Buy NIFTY (CMP: 6109) with a Target of 6170 & a Stoploss of 6080.

Buy ONGC (CMP: 334) with a Target of 340 & a Stoploss of 331.

Sell CIPLA (CMP: 397) with a Target of 391 & a Stoploss of 400.

Click on the following link to view the full report:
http://alankit.com/financialservices/pdf1.asp?file=ResearchReports%2FAlankit-DailyMorningOutlook_Mailer_29_May_2013.pdf

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Morning Bell: May 28, 2013

Key Indian indices are set to open on a flat note today tracking volatile trading from other asian markets. Back home, the slightly higher than expected results from Coal India may bring optimism while the cautious sentiment due to Q4 GDP data to be released on 31st May 2013 & derivatives contract expiry due on thursday may keep the markets rangebound today.


Key Events For The Day:

Quarterly Results: Gail India, Colgate Palmolive, DLF Infra.

US Consumer Confidence.


Derivative Strategy For The Day:

Buy NIFTY (CMP: 6083) with a Target of 6145 & a Stoploss of 6050.

Buy BATAINDIA (CMP: 829) with a Target of 841 & a Stoploss of 823.

Sell BIOCON (CMP: 274) with a Target of 268 & a Stoploss of 277.

Click on the following link to view the full report:
http://alankit.com/financialservices/pdf1.asp?file=ResearchReports%2FAlankit-DailyMorningOutlook_Mailer_28_May_2013.pdf

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