‘India needs to be creative, value additive rather than be argumentative or bureaucratic.’
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
EM Report card:
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
Election and Rupee
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
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.
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.
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.
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.
In last three months FIIs were seller in the Indian Equity and debt market. Sell off figure given below:
BOON IN DISGUISE:
NEGATIVE OF RUPEE FALL:
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.
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.
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.
Raw material of Consumer durable or some of it are imported will cost more.
Overseas travel to be costly, decline in rupee will increase the cost of travel.
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:
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:
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
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