On a year-end television programme, the anchor asked me (who was, as usual, bullish about India) and my co-panelist (who was, as usual, bearish about India) what would be our investment currency of choice for 2012. Well, we both agreed on the rupee being the best bet.My co-panelist felt that with a 3-5 year horizon, the rupee could earn 9 per cent relatively risk-free and would outperform most other currencies; even if it did not strengthen. My view is more aggressive: in addition to the interest gain; I expect a currency appreciation of at least 5-6 per cent over the next two years. But the rupee could certainly weaken from the current 52-53 level if the dollar continues to strengthen overseas, which has a high probability. The dollar has been weak for a long time — the dollar index or DXY fell from 120 in 2002 to 70 right before the mortgage crisis erupted in 2008 — which increases the probability of a turnaround. It has already recovered some ground (at around 80) confirming that in a crisis, the dollar is still the currency of choice. The market has been driven between what is called "risk off" — when investors feel uncertain — and "risk on"; and the dollar has been responding in kind: rising when risk aversion is high (risk off) and falling when investors feel a bit more aggressive. However, since October-end, the music seems to have changed. The dollar has risen from about 75 to 80 despite the fall in risk aversion — as measured by the volatility index, VIX. The VIX is now at a level that has historically signaled an increase in global risk appetite and inflows into emerging markets. Of course, with the year-end, markets are thin, and it is generally not a good idea to come to definitive conclusions. Nevertheless, my optimistic heart cannot help but notice these elements, which, if they persist into the New Year, could signal, a continued resurgence in the dollar and a renewed interest in risk assets — notably emerging market equities and currencies.For the rupee, there are conflicting signals. A strong dollar would generally translate into a weak rupee, particularly, given the still heavily short dollar positioning of the domestic forex market. On the other hand, if dollar strength is driven by a sense that the global economy — and the US, in particular — is not as bad as people had believed — certainly my view — it would also portend a renewed flow of investment into India. IT'S ALL ABOUT MONEY, HONEY RUPEE COULD OUTPERFORM OTHER CURRENCIESRUPEE VOLATILITY WILL CARRY INTO 2012DOLLAR WILL CONTINUE TO STRENGTHENSTRONG DOLLAR WILL FAVOUR INVESTMENTS IN INDIADESPITE CONCERNS, THE EURO WILL HOLD TOGETHER As we all know, most investors have been sitting on a lot of cash for some time now. And, again, despite the so called "policy paralysis" and the rona dhona of many of our captains of business and industry, the India investment story is very much alive; it is quite well and actually kicking — during April-October 2011, foreign direct investment was up 50 per cent relative to the previous year. I see continued volatility in the rupee, certainly in the early part of next year, which is not a bad thing, always. Perhaps, the main reason we have got into this near-crisis situation is because rupee volatility was much too low for most of 2011. With the rupee steady around 45 from the start of the year till about August, forward premia as high as 6 per cent, and, it must be said the inertia-fed view that the rupee can only strengthen, few people with short dollar positions (importers and companies with ECB's) could be convinced to buy dollars. I know. I tried. And, of course, when the wheel turned, with the dollar shooting up in September, there was plenty of blood on the streets and balance sheets. If rupee volatility had been higher, it is likely that more companies would have hedged themselves, at least, partially.Coming back to the market, another twist in the tale is, of course, the Euro. Will it or won't it hold together? To my mind, it will. There is too much invested in its sustenance and the cost and process of unwinding will, perhaps, be too much for the European economy to take. The side effect of keeping it together will, bring a dramatic change in European governance, with profligate democracy giving way to a more Germanic control. Indeed, it is ironic that as West Asia is discovering and demanding more self-determination, countries that have been democratic for decades, including India and the US, are finding themselves pushed against the limits of democracy.When the market fully accepts that the Euro will hang together, despite the ongoing wobbles in the sovereign debt market, it could trigger a relief rally, further adding to global volatility. But once the realisation becomes widespread, it should give way to the underlying dollar strength since the only way that Greece and other weak European economies can survive is if the currency remains much weaker.Thus, look for more wildness in 2012: a rupee ranging between 47 and 57, with an average somewhat stronger than 52.50; the Euro could dance between 1.20 and 1.35.(This story was published in Businessworld Issue Dated 09-01-2012)
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As hinted at its 16 December monetary policy review, stage seems to be set for RBI to finally reverse its fight against inflation by cutting rates. State-run Union Bank of India cut its base rate by 10 basis points to 10.65 per cent on Thursday, becoming the first Indian bank to do so this year, signalling interest rates may start softening in the economy.In the December 16 policy, RBI Governor D Subbarao had opted for a halt to the 13 consecutive rate hike cycle by keeping the rates unchanged. In its outlook for the rest of the financial year and beyond, RBI underscored the risks to growth; it also pointed out that sudden events could arrest the downward momentum of inflation.Things seemed to be helped along by the fact that food inflation fell to its lowest level in almost six years at 0.42 per cent for the week ended December 17, with a sharp decline in prices of essential items like onions and potatoes likely to prompt the RBI to cut interest rates at its policy review next month.With food inflation declining to below 1 per cent, the lowest since April, 2006, Finance Minister Pranab Mukherjee hoped that headline inflation would drop to 6 per cent by March-end."If this trend continues, then you will have year-end (headline) inflation around 6 per cent (plus/minus)... But it can not be lower than 6 per cent, because inflationary pressure was higher in weeks before," he told reporters.Food items have a 14 per cent share in the overall Wholesale Price Index (WPI) basket.India's main policy rate is at its highest since July 2008 after the central bank raised rates 13 times since March 2010 to rein in high inflation.Experts attributed the fall to a good kharif harvest as well as a high base."This is a base affect and the good kharif harvest has also contributed to moderation. We expect the prices to remain low for the next few weeks and this may help the RBI to go for rate cuts in the near future," Crisil Chief Economist D K Joshi said. While suggesting that food inflation may go into the negative zone by December-end, Joshi, however, cautioned that headline inflation is likely to remain high due to elevated levels of price rise in manufactured items.Manufactured inflation, which forms over 65 per cent of the WPI basket, is hovering around 8 per cent.Union Bank of India Takes A Stance"Credit growth is not very high and interest rates have peaked so we thought it is a good time (to pass on the benefit)," M.V. Nair, chairman and managing director of the bank, told Reuters."We have to see the signal that Reserve Bank gives but rates coming down will be very gradual. It may stand steady one or two quarters," Nair told CNBC-TV18, when asked whether he expected a 50-60 basis points fall in lending rates by March.Pausing its interest rate tightening in its policy review on December 16, the central bank signalled a shift in its focus to growth from fighting inflation."From this point on, monetary policy actions are likely to reverse the cycle, responding to the risks to growth," the RBI had said in a statement.Analysts were, however, skeptical other banks will take a cue from Union Bank's move."I'll be surprised if other banks follow. Union Bank is too small to force others to move and 10 basis points is hardly anything," said Krishnan A.S.V, analyst with brokerage Ambit Capital.The bank's shares, valued at $1.6 billion, rose as much as 4.3 per cent after the announcement. The stock ended 2.8 per cent higher at in a Mumbai market that was down 1.17 per cent.
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Credit rating agency Crisil said on Wednesday depreciation in the rupee will shave off up to Rs 4,000 crore from the profits of Nifty companies in the December quarter. "Due to a further 8 per cent depreciation of the rupee against the dollar in this quarter, companies are likely to report further foreign exchange losses of Rs 3,500 to 4,000 crore in the quarter," Crisil head for industry and customised research, Prasad Koparkar said in a report.The agency said that even in the July-September quarter, 42 of the 50 companies on the National Stock Exchange's index Nifty lost Rs 4,800 crore or close to 8 per cent of their profits before taxes due to the rupee's fall. The rupee has been one of the worst performing currencies globally, having ceded around 18 per cent to the US dollar since August. As the concerns mount, the Reserve Bank had to intervene in the market by selling part of its $300 billion reserves to curb the volatility, besides clamping down on traders. "Demand for the dollar increased due to repayment pressures on private foreign debts and the rising import bill. But supply failed to keep pace as foreign inflows dwindled due to rising risks in the Eurozone. The resultant mismatch led to the sharp fall of the rupee," the agency's chief economist Dharmakirti Joshi said. The companies' profits will get dented due to the high level of foreign debt on its books, Crisil said in a note, adding the cumulative foreign currency debt is an estimated Rs 1.5 trillion or around 24 percent of their total outstanding. Sectors like oil refining and marketing, telecom and steel, which have a fourth of their debt in foreign currency, are likely to get affected, it said. For crude oil import dependent oil refining sector, the troubles will be compounded, it added. In contrast, export-oriented sectors like IT and pharma, which also have low debt levels, are expected to gain from the rupee depreciation, Crisil said.(Reuters)
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The Bombay Stock Exchange (BSE) 30-share Sensitive Index (Sensex) rebounded this week to end with a gain of 1.6 per cent at 15738.7. The rally in the US and European markets also brought some festive cheer across Asian markets including India ahead of Christmas. The market gained after last week's sharp fall following bargain hunting by players that picked stocks at lower levels. News of food inflation slipping to a near four-year low at 1.81 per cent boosted marketmen's confidence as did reports that the government was looking at all options to attract foreign capital inflows. An upbeat report on the US housing market, coupled with an encouraging reading on German business sentiment and a well-received Spanish bond auction triggered the spike in risky assets, contributing to positive sentiment in the market.Though most of the Asian and global markets will be closed ahead of the new year, the Indian market could open positive on Monday following more than expected new homes sales in the US. On Friday, after the Indian market closed, US reported its sales of new homes. For the month of November, new homes sales rose to a seven-month high of 3.15 lakh, up 1.6 per cent, adding evidence of stabilization in the housing market. The news also helped lift the US market on Friday with the Dow Jones Industrial Average closing one per cent to close at 12,294.Next week, all eyes will on the Indian parliament. The Winter Session of parliament has been extended till December 29, 2011 to discuss crucial bills such as Lokpal bill, the whistleblower bill and judicial accountability bill. Any positive news from the government will act as a trigger for the Indian market.The Indian market can be expected to remain volatile ahead of the future & option expiry on Thursday on 29 December 2011. On the same day, the weekly inflation data will be reported in India, while the US will announce its initial jobless claim data. On Friday, the Indian government will also come out with the current account balance for third quarter.Any positive in the parliament would send the right signals to the market and investors — particularly foreign institutional investors (FIIs) — that the government is serious about reforms. So far the government has been struggling to pass crucial bills in parliament amid stiff resistance from Opposition and allies alike. Rising fiscal deficit has also added to the long list of concerns. In an environment of high inflation, the new food bill is expected to add a further burden of Rs 2 lakh crore per year to the exchequer. But even without the addition of Rs 2 lakh crore in food subsidies, the fiscal deficit at the end of FY12 is estimated to be at 5.6-5.7 per cent of the total GDP, compared to the government's earlier estimate of 4.6 per cent. If the food subsidy burden is considered for this year, than the fiscal deficit of India goes up to 7.5-7.7 per cent of GDP.All eyes are on the upcoming Uttar Pradesh elections and the union budget next year. One has to see whether the government gathers enough courage to implement important economic reforms.This week had started on a weak note following all-round pessimism among marketmen that pulled the Sensex down to its 28-month low on Tuesday. The market in the first two days of trade fell by 2 per cent with the Sensex touching a low of 15,135.86 in intra-day trades on Tuesday. However, it bounced back on Wednesday on reports that the government is looking at all options to attract foreign capital inflows. The finance ministry official said India can expect robust inflows of funds from FIIs in the long term and that current foreign fund outflows from India are temporary. Food inflation easing sharply to a near four-year low also raised hopes that easing inflation may prompt the Reserve Bank of India (RBI) to cut interest rates to revive sagging economic growth. During the week, the Sensex touched an intra-day high of 15,911.23 on Friday, before profit booking at higher levels pulled the index. But it still managed to end the week higher than last week at 15,738.7, up 247.35 points.It's not a runaway market as uncertainties surrounding the market aren't going away anywhere soon. Though liquidity easing in the Euro-zone and US may see some money coming to emerging market like India in the coming months, it will only be the developmental reform that will help our markets move upwards and that today seems to be in a limbo. Until India specific issues aren't adressed, particularly regarding opening of investment windows, equity can't be expected to witness a clear upsurge. But the triggers that the market is looking for would be clear signs that inflation is on the wane, signs of recovery in capital spending and consumer demand and third that the government has the resolve to see through critical reforms. Any combination of these would go a long way toward convincing investors that the fundamentals justify the type of premium valuation Indian markets have commanded in the last few years.There is really nothing that has changed today or in the last one year. What has changed is the perception among people. Experts feel this market is an absolute buying opportunity, and from a FII standpoint with rupee at 52 it's like picking stocks at a Nifty of 4000 levels. The reason for such confidence about the Indian market is due to the expectation of a strong corporate performance. Despite the dismal September ended quarterly performance as well as expectation that quarterly performance for the period ending December 2011 will be the worst in FY12, the expected earnings (EPS) for the Sensex for FY12, even after revising, is around Rs 1,131. This means the Sensex today at a forward price-to-earnings (P/E) ratio is trading close to 14 times. While for FY2013, on an estimated EPS growth of Rs 1277-1300, the Sensex P/E is trading around 12 times. It's true that today environment is surrounded by pessimism and fear and there is a high probability that the market may get into a panic mood which could further pull down the market. But it is also true – even the best of minds have never always been successful in finding the bottom. Instead of trying to guess or identify the point of maximum uncertainty, investors should start picking up frontline blue-chip stocks. When the tide turns these will be the first to rebound.
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Reserve Bank of India chief Duvvuri Subbarao on Tuesday said monetary steps may be warranted to curb inflation expectations in face of sustained high food inflation, flagging the need to revisit politically sensitive subsidy schemes in agriculture.Subbarao also said that the government's food for work programme and proposed food subsidy bill will further raise fiscal deficit and inflationary pressures.Food inflation has been stubbornly high over the last few years in India, inspite of record foodgrain production and robust buffer stocks.The Reserve Bank of India (RBI) has already raised rates 13 times since early March 2010 to clamp down on stubborn inflation, largely driven by high food prices."The direct role of monetary policy in combating food price pressures is limited, but in the face of sustained high food inflation, monetary action may still be warranted to anchor inflation expectations," Subbarao said in a speech at a conference in Hyderabad.The comments, hawkish as they seem, may not warrant a change in RBI's stance which has signalled a likely pause in rate hikes in the December policy and may be extend it, if inflation falls in line with the RBI's projected trajectory.The central bank, in a bid to ease tight banking system liquidity, will buyback bands up to 100 billion rupees ($1.9 billion) on Thursday.Subbarao said large increases in the minimum support prices on food grains by the government to farmers was one of the reasons driving food inflation."There is a case for revisiting subsidy regime for a number of reasons, including the pressure it exerts on food inflation."His criticism comes on the first day of a parliamentary session in which the government will propose doubling food subsidies to about $24 billion in an effort to bolster its support among millions of poor Indians ahead of state elections.Agricultural subsidies are a politically volatile issue as farmers constitute a large votebank for political parties.The central bank chief also said the supply chain of farm products is a major source of price pressures and the cross-country experience on the benefits of multi-brand foreign direct investment on inflation is "ambiguous".The cabinet may decide to allow chains such as the world's largest retailer Wal-Mart Stores Inc to operate in the country with a majority stake under strict local sourcing rules, a senior government source told Reuters.A draft cabinet note suggesting so-called multi-brand retail foreign firms could hold up to 51 percent ownership has already been reviewed, a senior government source said on Friday.Subbarao also said that the government's proposed food subsidy bill is another major potential source of inflationary pressure."The higher food subsidy burden on the budget will raise the fiscal deficit, exacerbating macro level inflationary pressures."Estimates suggest that 68 per cent of the country's 1.2 billion population will get a legal entitlement for food grains after the bill is enacted, which will significantly raise annual grain procurement demand even as the available marketed surplus would not increase in the same proportion.The governor made it clear "a lasting solution to food price pressures lies in a supply response" from the government.Data released last week showed India's food price index rose 10.63 per cent and the fuel price index climbed 15.49 per cent in the year to Nov. 5.Forex InterventionSubbarao said the RBI's rupee policy remains the same, on a day when it slid to its life-low."Our (RBI's) policy remains the same, which is to manage volatility in exchange rate and to ensure that exchange rate volatility does not impair macro-economic stability."Subbarao, added that exchange rate movement, especially in the last three to four days was driven by global dynamics and the RBI expects reverse adjustment (in rupee) to take place when the European situation resolves itself."Till then obviously I can't comment whether the RBI is intervening or not but we are watching the market," he said.Earlier in the day, the partially convertible rupee hit a record low of 52.73 per dollar and at 0801 GMT was at 52.465/470.(Reuters)
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In an eight-day long losing streak on Monday, the BSE benchmark Sensex fell below the psychological 16000 level for the first time in six weeks, losing over 425 points on heavy foreign fund outflows amid depreciating rupee and weak global markets. The rupee touched the 52 per dollar mark for the first time in 32-1/2 months on Monday as domestic equities weakened and oil importers bought dollars.The Bombay Stock Exchange 30-scrip index, Sensex, which had lost nearly 1,200 points in last seven straight sessions, plunged further by 425.41, or 2.60 per cent to 1,5946.10, the first dip below 16,000 after October 5.Similarly, the broad-based National Stock Exchange 50-scrip index Nifty fell below 4,800 -- down 127.45 points, or 2.60 per cent to 4,778.35. Metals, banking, realty, auto and IT sectors were hit hard as trading sentiment dampened on weak trend in Asia and lower opening in Europe on deepening euro zone debt crisis.Reliance Industries, with heaviest weight on the Sensex, fell 2.62 per cent and the second heaviest Infosys, by 2.86 per cent. The two stocks carry 20 per cent weight on Sensex.BHEL, Bajaj Auto, Bharti Airtel, DLF, HDFC Ltd, HDFC Bank, ICICI Bank, Jindal Steel, Larsen and Toubro, Mahindra and Mahindra, State Bank of India, Tata Consultancy Services and Tata Power were other major losers.Besides, refiners like Indian Oil, Hindustan Petroleum and Bharat Petroleum lost ground on concerns that the weak rupee will increase the cost of crude imports.Of 30 Sensex stocks, 28 declined while Maruti Suzuki and Sun Pharma bucked the trend and ended in positive zone. All the 13 sectoral indices ended in the red. The rupee slipped as the euro fell, oil importers clamoured for dollars and weak equities heightened concerns of foreign fund outflows.Global Markets DownMeanwhile, World stock markets fell as a change of government in debt-laden Spain and warnings from Asian officials of a sharp growth slowdown underlined the challenges facing the world economy.Benchmark crude fell below $97 per barrel. The dollar strengthened against the euro but slipped against the yen.European shares retreated in early trading. Britain's FTSE 100 slipped 1.2 per cent to 5,300.67. Germany's DAX dropped 1.5 per cent to 5,715.68 and France's CAC-40 slid 1.3 per cent to 2,956.66.The Nikkei 225 index in Tokyo fell 0.3 per cent to end at 8,348.27, its lowest closing since March 2009.Wall Street was set to lose ground, with Dow Jones industrial futures falling 0.9 per cent at 11,659 and S&P 500 futures down 1.2 per cent at 1,199.80.Market jitters were in evidence a day after Spain voted in a new government _ the third time in as many weeks that Europe's debt crisis has toppled an administration. Governments in financially troubled Greece and Italy have also fallen.Worst Performing Stock IndexThe benchmark, which is down more than a fifth this year, is among the world's worst performing stock index. Foreign portfolio investors have bought equities worth $571 million so far this year, sharply lower than $29 billion they invested in 2010."A weak rupee is fuelling fears of a large-scale withdrawal from the (equity) market," said Deven Choksey, managing director at brokerage K.R. Choksey."A weak rupee means we will continue to import inflation. This is impacting corporate earnings and weighing on overall sentiment," said D.D. Sharma, senior vice-president at brokerage Anand Rathi.A near double-digit inflation has forced India's central bank to raise interest rates 13 times since March 2010, slowing down Asia's third-largest economy.Top lender — State Bank of India, HDFC Bank and ICICI Bank — were down about 1.8 per cent each.India's software exporters, which derive majority of their revenues from overseas, were down 1.15%, on concerns that a lingering euro zone concerns could curtail revenue."A weak currency wouldn't help IT exporters beyond a point as they hedge their position," said Ambareesh Baliga, chief operating officer at brokerage Way2Wealth Securities .Top software services firm TCS fell 1.87 per cent, while smaller rival Infosys was down 0.78 per cent.Sluggishness in pushing domestic policy reforms have also hit investor sentiment.Parliament will convene for its winter session on Tuesday with a long list of pending policy decisions, but analysts do not expect too many policy initiatives.(Agencies)
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The rupee touched the 52 per dollar mark for the first time in 32-1/2 months on Monday as domestic equities weakened and oil importers bought dollars.At 3:13 p.m. (0943 GMT), the partially convertible rupee was at 52.00 per dollar, 1.3 per cent weaker than Friday's close of 51.3350/3450, after touching 52.02, its weakest level since March 5, 2009. The RBI likely sold dollars starting 51.79 rupees on Monday to arrest the sharp fall in the local currency, five traders said.At 11:12 a.m. (0542 GMT), the partially convertible rupee was at 51.60/61 per dollar, off its low of 51.7950 -- its weakest since March 12, 2009. "The quantum has not been too high today, but they (RBI) likely sold starting 51.79 and up to 51.69 levels," a senior dealer with a state-run bank said.The RBI has always maintained that it does not protect any particular level on the rupee and would only intervene to iron out excessive volatility.RBI intervened in the foreign exchange market in September, after following a hands-off approach for nine straight months, as the unit fell to its lowest level in more than two years, its monthly bulletin showed earlier this month.The central bank releases intervention data with a two-month lag.Ability To Intervene In FX Market LimitedThe ability of monetary authorities to intervene and stem the rupee's slide is limited, a senior finance ministry official said on Monday, after the currency skidded to its lowest in 32 months."The rupee cannot slide beyond a point. Ability to intervene (in the forex market) is also limited," Economic Affairs Secretary R. Gopalan told reporters.The partially convertible rupee has slumped 15.3 per cent from its strongest point this year in late July due to a widening trade deficit, rising oil import bill and subdued foreign inflows.At 2 p.m. (0830 GMT), the rupee was trading at 51.8350/8400 per dollar, within sight of its record low of 52.20 hit in March 2009.(Reuters)
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The Reserve Bank of India (RBI) will change its monetary policy stance only if inflation eases and further rate increases will depend on the price rise situation, Subir Gokarn, a deputy governor at the bank, said on Wednesday."It (further rate hike) depends on the inflation situation," Subir Gokarn said while addressing students in Jaipur."We raise rates not because it is an end in itself. To the extent we see the problem persisting, then there is a basis to raise rates but if we see the problem is starting to ease off, then that would provide the basis for a change."India's food and fuel inflation accelerated in mid September, indicating persistently high inflationary pressures in the economy.Data for September, due around 12 noon on Friday, is likely to show the wholesale price index probably rose 9.70 percent a year earlier, easing slightly from 9.78 percent in August.However, inflation continues to stay at nearly twice that of the RBI's comfort levels, raising the possibility of another rate increase by the Reserve Bank of India on Oct. 25, when it meets to review monetary policy.Gokarn also said higher income levels were increasing the tolerance for higher inflation.The benchmark 10-year bond yield rose following Gokarn's comments on the policy stance, while weaker-than-expected factory output data, already factored in by the market, also lead to some selling.Industrial output in August rose a lower-than expected 4.1 percent from a year earlier, government data showed.The 10-year paper was trading at 8.73 percent at 0630 GMT, up 3 basis points from its previous close.The inflation data would now be crucial for helping cement views regarding the policy stance.Gokarn said robust domestic demand will help absorb the shock from the global slowdown.Indian manufacturing growth nearly stalled in September, turning in its weakest showing since March 2009 on slowing output and order growth as a year-and-a-half of interest rate increases and weakening global conditions take a toll on Asia's third-largest economy."Countries like China and India has large population and hence has robust demand which will help in absorbing the global shock."(Reuters)
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