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Rupee: The Carnage Continues
 
  

 

SHARETIPSINFO >>Research Reports >>Rupee: The Carnage Continues >> (26-08-2013)

 

‘India needs to be creative, value additive rather than be argumentative or bureaucratic.’
EM is back to the situation of 1990’s. The story goes back to 1990’s when US wanted to integrate the Global Economy and went for Economic Imperialism after the disintegration of USSR. It started printing dollars and flushed the global economy with easy money. US Corporation with easy money at their side raided the Global economy, changed the way they look at thinks, a total Americanization. America financed war in order to gain control of energy starting from 1991 to till date.

Then suddenly in 2008 realization came to American that they can no longer keep on printing money and outsourcing job. This was the cost American paid to gain control of world economy. In 2008 systematic risk merged as the bank started failing, unemployment high and can no longer be consumption driven economy. American stitched packages to de-risk the economy and bail out corporation. This went for 5 years and again world economy saw renewed supply of dollars. But Americans new when normalcy comes will stop the excessive baggage they were carrying and will reduce their deficit. Now time has come to exit the package. This will bring us to same period as in 1990’s when dollar was not there to give you growth.  

Now the question arises ‘Are we moving from Globalization to Nationalization’?

Rupee @ 75/$ in next 1 year
Indian currency fell by 8% in last 1 month, the worst currency amid the emerging market.
The carnage we have seen in the currency market is not only restricted to India, it is now phenomenon that have been giving sleepless night to all the EM economy. Dollar has been moving out of all the EM economy to US and developed market as their economy starts looking better. It is the unwinding of dollar carry trade that is being seen right now. We expect rupee could touch @ 75/$ in next 1 year.

EM Report card:
Currency Matrix: Fall in Last 1 month


India

8%

Brazil

7.60%

Russia

0.60%

Turkey

2.30%

Indonesia

5%

South Africa

5.60%

Forex Reserve:


India

$278 bn

Brazil

$373 bn

Russia

$512 bn

Turkey

$107 bn

Indonesia

$93 bn

South Africa

$39 bn

 
GDP Growth: Jan – March 2013


India

4.80%

Brazil

1.92%

Russia

1.62%

Turkey

3%

Indonesia

6.03%

South Africa

1.90%

Growth stagnated due to many issues, not only government is responsible for this but many other agencies killed the economic prosperity. Stopping of iron ore mines led to decline of metal and mining sector. Alleged 2G Scam which was considered on notionally figure and cancellation telecom licenses leading to increase in the call rate. There could be ‘n’ number stances where Indian themselves put the economy on the downward trajectory.

CAD (% of GDP): Jan – March 2013


India

-5.07%

Brazil

-3.01%

Russia

2.98%

Turkey

-5.93%

Indonesia

-3.08%

South Africa

-5.80%

Election and Rupee
India will go for poll next year and it has been seen for 30 years that rupee lost its value before election. Call this a coincidence or miss governance, high deficit and lack of clarity on policy front a major culprit. Let’s see how rupee fared before election.


1984

-21%

1989

-24%

1991

-22%

1996

-19%

1998

-13%

1999

-14%

2004

11%

2009

-25%

2014 (till now)

-20%

Barring 2004 election the currency has shown depreciation before all the election. 2004 can be taken as the exception as the economy was doing good and ‘India shinning story were sold’.

REASON FOR THE FALL IN INDIAN AND EMERGING MARKET CURRENCY

  1. Expected tapering of bond buying from US:

US Fed is trying to cut down the bond buying which is currently at $85 billion per month. It is expected that US will cut down purchase of bond by the end of 2013 and may be by next year exit the bond program.
The US Fed bond buying and different parts of Quantitative easing program that was started in 2008 to contain the crisis infused liquidity into the global system. This liquidity depreciated dollar and increased the prices of all the asset classes like equity, real estate, bonds, gold & silver and agri-products. And now when US are trying to exit the program is giving jitter to the global asset class market and we are seeing a meltdown. Sooner or later it was bound to happen. The Global easy money time is over and dollar is going back to US Fed chest. So prepare for more pain.
This is just beginning when there is talk of tapering that has given shock to global currency and asset market. Think of US really exiting the bond purchase program.
We expect rupee to be nearing @75/ $.

  1. High Current Account Deficit:

India’s CAD is very high that makes it more vulnerable. CAD stands at -5.07% in January – March. Higher CAD means country has to finance deficit from Capital Account and this will see more pressure on the currency. It is more difficult to financing higher CAD when FIIs are taking money out of the country. Russia has Current Account surplus and the currency has just fallen by 0.6% in last one month. This is the benefit of having current account surplus. The only solution is reducing import and shore up the export.

  1. Foreign Exchange Reserve:

India has forex reserve of $278 bn; this is much lower compared to China and Russia. Russia has Forex reserve of more than half trillion dollars and China has forex reserve of $3.4 trillion dollars. Higher forex reserve helps the country managing the currency efficiently and keeping the stable exchange rate. At this point of time RBI could have effectively intervened into the currency market and sold dollar from the reserve. But seeing the low forex reserve and massive outflow RBI cannot waste dollar reserve.Missed opportunity of building Dollar Reserve. RBI lost the opportunity of building the dollar reserve when in 2007 Rupee reached Rs 39/ $. RBI could have intervened proficiently at Rs 44/ $ and bought dollar to keep the Rupee stable and help exporters. Though buying of dollar would have increased money supply in the economy leading to inflation but that too could be sterilized by selling bond by RBI.Rather Indian fiscal policy maker started taking steps to contain FIIs inflow by trying to ban P Notes and other measure.  

  1. FISCAL POLICY PARALYSIS:

No concrete steps taken by Indian government to bring in FDI. Though Government has taken several steps in relaxing the FDI norms for different sector but still no major funds have been committed on lack of clarity. There is also consensus amid the political parties on different issues. FDI retail and FDI aviation relaxed but still we are waiting for investment to come in. Indian policy makers are very bad when things come for execution.

  1. FIIs Outflow:

In last three months FIIs were seller in the Indian Equity and debt market. Sell off figure given below:


FIIs EQUITY MARKET INVESTMENT

(Rs Crore)

JUNE, 2013

-9,318

JULY, 2014

-7,120

AUGUST, 2014

-1,845

TOTAL

-18,283

FIIs DEBT MARKET INVESTMENT

(Rs Crore)

JUNE, 2013

-31, 583

JULY, 2013

-12,409

AUGUST, 2013

-5,481

TOTAL

-49,473

BOON IN DISGUISE:
The decline in rupee could be a boon in disguise as our languishing export will increase. It has been historically that export will increase and import comes down but with lagging effect. It takes time to adjust to changed environment.
Japanese are happy when there currency depreciates why we can’t be happy. If we stop dependence on imported energy and find some alternative source and increase the value addition to the material that we export our Current Account will be in surplus.
Exchange rate is just the number you can play the way you want. Stock market and speculation is not whole economy but real economy and real production is where 98% population depends.

NEGATIVE OF RUPEE FALL:

  1. INFLATION:

Inflation to increase further as imported raw material cost will increase and the prices of crude will increase. India imports 70% of the energy requirement depreciated rupee means more to pay for crude import. We could expect Rs 2-3 / liter increase in prices of diesel.
Transportation cost, agri culture produce and other production too will increase with increase in fuel cost.

  1. INTEREST RATE:

Interest rate to remain high and could increase further. This will lead to lower credit off take and lower investment. Aggregate demand will go down and will affect the GDP growth further.

  1. EDUCATION ABROAD:

Guys who are studying abroad or one wishing to be one of them will have to face tough time. Depreciated rupee will make studying abroad more costly as one will pay more for it.

  1. CONSUMER DURABLE:

Raw material of Consumer durable or some of it are imported will cost more.
In nut shell all the thing that have imported element will be costlier.

  1. OVERSEAS TRAVEL:

Overseas travel to be costly, decline in rupee will increase the cost of travel.

  1. OVERSEAS DEBT:

Getting overseas debt would come with higher interest rate and higher debt servicing cost. Even companies having higher overseas debt component will see higher debt servicing cost.

POSITIVE OF RUPEE FALL:

  1. EXPORTERS:

Rupee fall will benefit the exporters. Fall in currency will make Indian goods more competitive in the international market. As US and European economy is out of woods ,there lies huge opportunity fall the Indian exporters to utilize this currency fall to take advantage.

Sectors to see upsurge:

  1. IT
  2. Textiles
  3. Rice
  4. Tea
  5. Leather
  1. TOURIST INFLOW:

 Tourist inflow in the country will increase leading to revival of Hospitality Industry. Even it will help hospitals as the medical tourism will boom. India is cost effective destination for treatment.

WHAT INVESTORS SHOULD DO
Investor should avoid sectors like OMCs, Power, Real Estate, Bank, CD, Capital Goods and Cement. Though we could see some bounce back from lower level but that could only be used for trading gains not for investment.
Investor should also avoid companies with higher debt burden and specially having overseas debt.

INVETMENT STRATEGY
IT, Pharma looks good at this point of time. One could accumulate these stocks in decline. The good thing about these sectors is companies are debt free and have cash surplus. Also most of the revenue is earned from the export.

Fundamental Pick

  1. NATCO PHARMA TARGET Rs 810
  2. TECH MAHINDRA TARGET Rs 1,600

CONCLUSION:
We feel this decline in rupee should be taken positively and one should looks to gain from export. India needs to be creative, value additive rather than be argumentative or bureaucratic.

 

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