Indian Rupee Fall - Poor RBI policies under Subba Rao

Indian Rupee is now 65 against dollar. This is a sharp fall from the 54 levels in late April 2013. This paper examines the following:

1.       Reasons

2.       Possibility of 1997 Asian or 1998 Russian crisis

3.       Unofficial Indian Funds Abroad' - A potential game changer

4.       Beneficiaries of the current fall in rupee

5.       Future Outlook

1.  Reasons

During 2005/6 period, the Indian Rupee (INR) had touched 40 levels which triggered a panic among exporters. It is stated that this was due to the weak dollar. During those days there were talks in GCC to remove USD peg. Thereafter the QE also increased the supply of the USD in the market. Thus abundant USD had made USD cheaper against INR. Moreover there were heavy demand for INR due to portfolio investments. Now the INR is under pressure due to lower Indian growth rate, which doesn't attract portfolio investments. On the other hand the portfolio investments seem to exit India. There are of course other factors such as tapering of QE by US Fed Reserve.  

2.  Remote Possibility of 1997 East Asian or 1998 Russian crisis

-         Short term currency exposure was high in both Asian and Russian crisis. The sudden exits created panic in the market. However even after settling the short term currency exposures there is sufficient  cushion in the current Indian situation.

-        East Asians also had high current account deficits and too much overseas debt. Quite a lot of overseas liabilities were of private businesses. In India, overseas corporate debt is relatively less and it amounts to only 29 per cent of all overseas obligations. Moreover vast majority of Indian corporates never tried overseas market due to strict criteria such as External Rating requirements, etc.

-         Short-term overseas debt was also very high in East Asia. World Bank data says short-term foreign debt respective to official foreign exchange reserves was high at 204 per cent in June 1997 for Korea, Indonesia (170 per cent) and Thailand (145 per cent).  As on today official Indian reserves are $ 280 billion and the short term debt is just a fraction of this amount!!

-         Private sector debt was too high for the Asian tigers. But Forex Debt to Exports ratio is much favourable in India

3. Unofficial Indian Funds Abroad' - A potential game changer

 

It  is an open secret that rich Indians and some of the leading politicians hold billions of dollars outside India. It defeats all logic for stacking up billions in Swiss & other European banks yielding low returns, this will have a positive impact on Indian currency situation. This category of unofficial funds range from $500m to $1.4 trillion.

 

See the link http://www.khaleejtimes.com/displayarticle.asp?xfile=data/international/2012/February/international_February536.xml&section=international&col

 

or http://timesofindia.indiatimes.com/india/Black-money-Indians-have-stashed-over-500bn-in-banks-abroad-says-CBI/articleshow/11871624.cms

 

Some of these funds will flow into the country at these levels . Another possibility is that Indian Govt will start initatives to attract some of these funds into India - this will be a game changer

This is over and above the normal NRI flows that have already gone up – if the NRIs including those who stacked millions abroad in Swiss Banks channel some funds into India, the crisis is over.

4. Beneficiaries of the current fall in rupee

Whilst NRIs, Software Industry & ancillary services, food, spice & related exporters, Pharma, etc will benefit, there is a different class of businesses who invested abroad since 2007 will also benefit.

Several leading Indian business groups - big and small - had invested abroad. The investments span across the globe including UAE, Qatar, Kuwait, UK, USA, Australia, Brazil and so on. These foreign assets are now having sharp value appreciation. A sample is given in the following table.

In fact this may be the right time for Tata Steel to offload its Corus Group investments, if it believes that this overseas investment will continue to be a drag on its profitable Indian operations.
 
 5. Future Outlook



Unreliable finance media in India

First of the financial media is unreliable - better to ignore most of their utterances. I have been watching what the financial media was saying ever since 5% growth was announced in Feb 2013. It was repeated in May 2013. The media said that Indian growth is much better than ‘mature economies’ and that Indian stock / business valuations were the cheapest in the ‘emerging markets’.  No sign of any panic – but since late June the mood changed suddenly with all kinds of negatives filling the media and with the foreign funds withdrawing to the better growth prospects “mature economies – read US and Europe’ India looks doomed.

This again reflects the fact that what financial media harps may be misleading. The real reactions of the investors are short term. 80:20 principle is applicable. 80% of the market moves are based on the reactions of the 20% of the investors. Such investors include grand daddies in the game such as Goldman Sachs and JPM.  

Beyond Headlines

-          Earlier this year Goldman sachs said Nifty to touch 6600  by year end;

-          JPM stated in August that Indian banks are now good buys

-          GS Singapore subsidiary buying into the Yes Bank. - it is a positive vote for Indian banking system.  http://www.moneycontrol.com/news/buzzing-stocks/goldman-sachs-singapore-buys-1862-lakh-sharesyes-bank_939300.html

Foreign Exchange Reserves

 Changes in FX reserves is critical Latest data as on 23 Aug shows a comfortable position as follows:

2. Foreign Exchange Reserves
Item	As on August 16, 2013		Variation over
			Week		End-March 2013		Year
	` Bn.	US$ Mn.	` Bn.	US$ Mn.	` Bn.	US$ Mn.	` Bn.	US$ Mn.
	1	2	3	4	5	6	7	8
1 Total Reserves	17,221.1	278,807.5	194.4	205.8	1,336.9	-13,238.7	1,125.5	-10,111.9
1.1 Foreign Currency Assets	15,551.4	251,561.1	190.2	211.7	1,425.1	-8,164.8	1,255.6	-5,095.7
1.2 Gold	1,267.9	20,747.0	-	-	-129.5	-4,945.0	-167.2	-4,967.7
1.3 SDRs	271.7	4,394.3	2.9	-3.9	36.3	66.7	29.0	37.7
1.4 Reserve Position in the IMF	130.1	2,105.1	1.3	-2.0	5.0	-195.6	8.1	-86.2

 

2. Foreign Exchange Reserves
Item	As on March 29, 2013		Variation over
			Week		End-March 2012		Year
	` Bn.	US$Mn.	` Bn.	US$Mn.	` Bn.	US$Mn.	` Bn.	US$Mn.
	1	2	3	4	5	6	7	8
1 Total Reserves	15,900.6	292,646.5	-24.7	-720.3	839.3	-1,751.0	839.3	-1,751.0
1.1 Foreign Currency Assets	14,126.3	259,725.9	-23.4	-689.4	821.2	-342.8	821.2	-342.8
1.2 Gold	1,413.8	26,292.3	-	-	31.3	-730.8	31.3	-730.8
1.3 SDRs	235.4	4,327.6	-0.5	-14.3	6.8	-141.7	6.8	-141.7
1.4 Reserve Position in the IMF	125.1	2,300.7	-0.8	-16.6	-20.0	-535.7	-20.0	-535.7

 

Despite all panic and headlines the reduction in the reserves is just $14 b between March and August. It is evident that there were inflows into the country and this will get stronger at the current levels of Indian  rupee (i.e. Rs 65 to dollar)

SEBI data for July 2013 shows that about USD 4 billion has been shifted out of FII during July 2013. http://www.sebi.gov.in/cms/sebi_data/commondocs/FIIInvestmentSector_h.html

It is evident that although there is some outflow of the foreign currency reserves, there are adequate balances to meet the demand of the short term funding i.e short term portfolio funds. If we consider the fact that about 20% -35% of this is owned by Indians abroad or by rich Indians or politicians through their be-namis, then the real impact going forward is quite comfortable.

Blame Subba Rao

 
Once again it is again proven that monetary policy is too important to be left to the whims and fancies of Governors. Whilst 'star' performer Alan Greenspan created all sort of troubles with his monetary policies, Subbarao was adamant to decrease 'Indian growth rate' to tame inflation. Hence he increased interest rates since 2011 which of course killed Indian growth and the FII interest in Indian market. Subbarao almost killed the golden goose. When he started hiking interest rates, INR was 46.90 against the dollar. Now it is 68.80 - a whopping depreciation of nearly 50%. One of the central bank duties is to ensure currency stability. Subba Rao has failed miserably in this. Of course this currency instability confuses the business community in the country - it is tough to plan ahead and engage in business transactions abroad.

Whilst Govt. of India has also contributed to the situation through its inaction and failure to control corruption and useless environmental laws, Subba Rao's RBI has also played a significant role through its poor monetary policies.

The good news is that he is moving out. The new comer is more savvy and with stronger connections abroad. Unlike Subba Rao who took pleasure in taking opposite stance to finance ministry of India, there is every possibility of better co-ordination under the new Governor.
 
Overall, there is no need to be panicky and this is the time to enter into some long term buys in Indian stock market. The consumption story in India continues to be strong. Investments in infra is picking up and this will lead to stronger story of investments in India from late this year.  

RBI Sponsored Currency Crisis

RBI clearly failed to attain stability in Indian Rupee

One of the main functions of any Central bank is to maintain currency stability so that the businesses and corporates can safely plan their operations, borrow and deal with clients and suppliers abroad confidently. Whilst RBI is supposed to be a guardian of foreign currency exchange rate, they have failed abjectly. Once $: INR was stable around Rs45/- now it has touched Rs 64/- and it may fall further resulting in higher cost of fuel, which drives the economy.

Many of the events what are being unravelled now has been discussed in this blog earlier. Please click the links for details 

http://www.financialstrategyonline.com/2011/12/rbis-smart-moves-taking-india-down.html 

http://www.financialstrategyonline.com/2012/06/indian-economy-under-attack-sleepy.html

http://www.financialstrategyonline.com/2012/04/daughter-in-law-trying-to-imitate.html

On another blog post dated 21 Oct 2011 Financial Thoughts had screamed as follows:

“Those who support further indiscriminate rate hikes must go back to US in 2006 when US Fed was blindly hiking the rates in pursuit of a mirage, which achieved nothing but a fantastic economic collapse in 2008”

Now let us wait for the new RBI Governor who will take charge next month.
The Govt. should not have extended the term of Subbarao as RBI Governer during Sept. 2013. Then the current currency crisis could have been avoided - whilst some depreciation in Indian Rupee would have been unavoidable due to the recovery in the USA, the sharp fall from Rs 45 to Rs 64 levels could have avoided by ensuring economic growth of 6.5% (i.e. by maintaining lower interest rates).  

Japan wants inflation ; India doesn't - Trade off?

It is interesting to note that two major economies in Asia are moving in opposite direction as far as inflation is concerned.

India was having inflation rates at around 9% in 2011 that resulted in RBI hiking the rates - this policy caused lot of miseries including sharp fall in the currency value as growth faltered. See the link: http://www.financialstrategyonline.com/2011/12/rbis-smart-moves-taking-india-down.html .

On the other hand, Japan is suffering from deflation . Their economic policies have kept the interest rates to the lowest in the world in their attempt to bring in some inflation- yet deflation continues over the past two decades. This serves as a challenge for Japanese policymakers.

Japan has been stuck with stagnant or falling prices for around two decades. The latest Japanese PM Shinzo Abe had made a goal of 2% inflation target after years of deflation and began quantitative easing in a big way since late 2012. However, the above chart illustrates that the prices points to a continuing decline.

Although Indian inflation numbers say WPI is reducing, this is stated to be "'a managed number" by changing the mix within it. Ask Indian consumer who will say that he is experiencing price increase across the board - this is not a surprise. Indian policy makers find it tough to contain inflation.

Abenomics' massive monetary stimulus was supposed to bring in inflation to a deflation driven Japanese economy - but not yet ; it proves tough for Japanese policy makers.

It seems that one of the key reasons for this dichotomy is the population. India is adding a population equivalent to Australia every year, the demand for all items - especially food - is on the rise. This results in inflation and it is not easy to control unless population growth is tamed.  Moreover, the percentage of young population is very high . See more on India's population troubles at http://www.financialstrategyonline.com/2012/10/population-growth-dynamics.html

On the other hand, Japan suffers from dropping population. see http://www.upi.com/Top_News/World-News/2013/03/28/Japans-population-decline-highlighted/UPI-11001364445270/  Even within the reduced population the percentage of elderly people are about 25% who tend to a lower consumption driver 

Will merger of both economies offer some kind of trade off? If not merger some kind of economic close action between both economies may help.

Real Reasons for the current Stock Market Rally

Since mid-April 2013, the stock markets are going up. Whilst US Fed Chairman has warned about the bubble formation on 8th May 2013, the markets continue to ignore him.

As we hear during the bubble formation the market pundits and bulls says 'this time it is different'. If we notice, the stocks that participate in the rally are few.

At least in Indian context (to a great extent applicable in the USA) most of the stocks are not participating in the increase in stock prices. Only those stocks listed in index are moving up.

What are the reasons for the rally? Whilst the bubble formation is evident and there are lot of justifications, Financial Thoughts believe that the major reasons include the following:

1. It is evident that the financial and commodity markets in the world are controlled by a few power entities based in the west. The commodities may be produced in Asia or Africa or South America - but the price of major commodities is still fixed mostly by the traders in the West as in 19th century. They have powerful media backing them up - who throw out articles for world consumption. For instance, the newspapers and other media still rely on mostly Reuters or Bloomberg.

2. A few institutions and powerful people in the West decides which financial assets or commodities to rise in the next year and they invent reasons. For instance, they said Gold is good for uncertain times and they promoted gold to new heights - entire world participated in the chorus. However, was it uncertain times? Ask Warren Buffet and similar investors who did not even bought an ounce of gold - now the same people who have promoted the gold has turned bearish all of a sudden & they have shorted it and profiting on its fall. Well - the media around the globe is spinning stories why Gold is a bad investment.

3. After ditching the Gold, the funds has to find some investment opportunity. They turned to Equities. They also fear that if the Fed increases rates, then bond prices will crash - so they are also selling bonds - and they have a problem of where to invest. They are not happy with US treasury rates. So they have decided to create a bubble in equity markets. And this bubble will get over and the media will write stories how fools got into the bubble and got themselves destroyed!!

One of the common patterns observable in these manipulated market is that there is an inevitable jump in the equity index towards the end of the session. Even if the market is flat, during the last 20 minutes some of the index stocks - especially those with higher weightage - to the index will move just to show the public the 'manipulated rally' is still on.

This is very true in Indian situation. The fundamentals haven't changed much and the oil prices are still high - recent current account deficit has increased. Moreover, Indian rupee is depreciating  against dollar, which will result in imported inflation.

Although they say WPI is reducing, this is stated to be "'a managed number" by changing the mix within it. Ask Indian consumer who will say that he is experiencing price increase across the board - this is not a surprise. Since India is adding a population equivalent to Australia every year, the demand for all items - especially food - is on the rise. Any rumour of lack of monsoon or lower agriculture production sends the prices high. No wonder food inflation is around 10% - and big surprise that the WPI is still dropping.

Let the investors be warned - don't be hyped by the media or the FII driven rally. All FII hope to sell the stocks and indices at high prices to Indians directly or indirectly (read mutual funds, etc) and make their money and get out.




 

An Interesting Indian Story -

One of my friends has recently emailed me a story . Hence, the authorship belongs to someone else. Since it is interesting I am hosting it in this blog. 

Ant & Grasshopper

The Ant works hard in the withering heat all summer building its house and laying up supplies for the winter.

The Grasshopper thinks the Ant is a fool and laughs & dances & plays the summer away.

Come winter ,the Ant is warm and well fed. The Grasshopper has no food or
shelter so he dies out in the cold.

Indian Version

The Ant works hard in the withering heat all summer building its house and
laying up supplies for the winter.

The Grasshopper thinks the Ant’s a fool and laughs & dances & plays the
summer away.

Come winter, the shivering Grasshopper calls a press conference and demands
to know why the Ant should be allowed to be warm and well fed while others
are cold and starving.

NDTV, BBC, CNN show up to provide pictures of the shivering Grasshopper
next to a video of the Ant in his comfortable home with a table filled with
food.

The World is stunned by the sharp contrast. How can this be that this poor
Grasshopper is allowed to suffer so?

Arvind Kejriwal stages a demonstration in front of the Ant’s house.

Anna Hazare goes on a fast along with other Grasshoppers demanding that
Grasshoppers be relocated to warmer climates during winter.

Amnesty International and EU criticizes the Indian Government for
not upholding the fundamental rights of the Grasshopper.

The Internet is flooded with online petitions seeking support to the
Grasshopper (many promising Heaven and Everlasting Peace for prompt support
as against the wrath of God for non-compliance) .

Opposition MPs stage a walkout. Left parties call for ‘Bharat Bandh’ in
West Bengal and Kerala demanding a Judicial Enquiry.

CPM in Kerala immediately passes a law preventing Ants from working hard in
the heat so as to bring about equality of poverty among Ants and
Grasshoppers.

BJP wants Sonia Gandhi’s apology.

Pawan Bnasal in Rail budget allocates one free coach to Grasshoppers on

all Indian Railway Trains, aptly named as the ‘Grasshopper Rath ‘.

Finally, the Judicial Committee of SC drafts the ‘ Prevention of Terrorism
Against Grasshoppers Act’ [POTAGA], with effect from the beginning of the
winter.

Kapil Sibbal makes ‘Special Reservation ‘ for Grasshoppers in Educational
Institutions & in Government Services.

The Ant is fined for failing to comply with POTAGA and having nothing left
to pay his retroactive taxes, it’s home is confiscated by the Government and
handed over to the Grasshopper in a ceremony covered by NDTV.

Arvind Kejriwal calls it ‘A Triumph of Justice’.

Baba Ramdev calls it ‘Socialistic Justice ‘.

CPM calls it the ‘Revolutionary Resurgence of the Downtrodden ‘

Obama invites the Grasshopper to address the UN General Assembly.

..
..

Many years later…

The Ant has since migrated to the US and set up a multi-billion dollar
company in Silicon Valley ..

100s of Grasshoppers still die of starvation despite reservation somewhere
in India …
As a result of loosing lot of hard working Ants and feeding the
Grasshoppers, India is still a developing country!!!

GOOD NEWS - RBI CUTTING THE RATES & INDIANS REDUCE THEIR GOLD CRAZE

Finally the wholesale inflation in India is below 6%. Some critics say that this is nothing but a ‘managed’ inflation reduction by changing the reference data. It is ok to do so as long as it is not a blatant invention. Those who know how company’s announce earnings know that there is some earning management. Hence, when a sovereign releases its earnings equivalent economic data, some management is acceptable. Another bunch of critics say that these figures are related to wholesale prices & not the consumer prices. They point out that the consumer price index may still be above 10%. Well, what we want is rate reduction from RBI and if the reduction in wholesale inflation will help to achieve that, we ought to welcome it. Hopefully, consumer inflation will reduce in due course.

How much RBI will cut the rates on 3^rd May 2013? Stock market has rallied – Nifty has nearly touched 6000 level despite poor earnings by some corporates and low Indian growth rates. Some die-hard optimists predict 0.75% cut, a few brokers expect 0.50% cut while bankers such as Barclays, RBS predict 0.25% cut. Financial thoughts believe 0.25% is more reasonable as RBI has already reduced the rates by 1% already.

Will the markets zoom further? It all depends also on political risks- the mother of all risks!. It is a fact that UPA is a minority government and relies on outside support-which can be gone in day or two.

Ever since humans invented ‘private property’ encroachment of neighbours property exists and a form of greed. China is no exception as it clandestinely entered into Indian Territory.  They do it with all their neighbours – Vietnam, etc. China’s economic encroachment has left millions unemployed in several countries; however China did supply cheaper goods by ensuring that a significant portion of their own population worked under conditions of ‘near slavery’ or bonded labour. Whilst China’s economic encroachment is acceptable in the spirit of competition and capitalism, the border encroachments cannot be justified in any manner.

Any escalation is border-dispute with China and mini war could be yet another risk-well a sort of ‘black swan’ risk. Probability of this happening is negligible; but impact would be severe.

Indians Loose Billions in Gold

Forbes recently reported that hedge fund gurus John Paulson and David Einhorn who invested heavily into gold has lost more than USD One billion when the gold price became bearish during mid-April spooked by fears of sale of gold by Cyprus bank.

No one reported how much Indians as class of investors lost in this gold debacle. During the last one year, whenever I met Indian businessmen who frequents between Dubai and India, they mentioned the craze of Indians for gold. They lost trust in real estate (due to several scams), stock market and chit funds (again there are several scams). So the funds were flowing into gold. Even RBI or similar authorities have come out with a report saying that Indian bank deposits recorded slower growth because Indians pumped money into the gold instead. The result was that Indians imported gold in tons – over the last couple of years, Indians imported and horded gold worth USD 120 billion. So, Indian investors might have lost more than USD 10 billion when the gold prices tumbled sharply.