The rupee is plumbing new depths and currently is the fourth-most depreciated currency in the world and the most depreciated in the Asian continent. A weaker rupee is a matter of concern for everyone. Read this space to know about the factors causing rupee to decline.
The falling rupee reached an all time low of 60.72 on 26th June 2013. Some of the key reasons attributed to the free fall have been continued dollar demand, month end requirement by corporate and oil companies, rise in the USD vis a vis other currencies, bearish sentiments towards emerging economies and withdrawal of FIIs from both debt and equity markets. Another factor often mentioned is that the RBI has chosen not to intervene, as it does not have the adequate ammunition to stall the fall.
Surprisingly, if one peruses through various websites, every time the rupee had a free fall, it is precisely because of all these very reasons that are mentioned; be it Oct 2008 when the rupee breached `49.50’; July 2011 when it breached `43.85; or November 2011 when it breached `52.73. While the rupee has not been able to recover after the November 2011 fall, largely due to policy paralysis , it has further worsened to breach the 60 mark .It is said that 57.50 was the last line of defense and beyond that level it is open to sky.
The FIIs sold $6.2 billion worth of stocks ($1.4 bn) and bonds ($4.8 bn) in June 2013 alone which resulted in a steep depreciation of the rupee. A fall triggers margin calls resulting in over reaction and panic. As a result, the rupee slid to a deeply oversold territory.
The rupee is the fourth-most depreciated currency in the world and the most depreciated in the Asian continent. A weaker rupee is a matter of concern for India as India imports for over 70 % of its oil & gas requirements and the depreciation of the local currency has made imports more expensive.
Let us have a look at some key data:
Rate (` :$)
Obviously, this is a very short-term data but a good indicator of sentiment. As on 28th June 2013, although the rupee has not recovered to the June 11 levels, the equity markets have surpassed the June 11 levels by almost 1 %. One can take any set of past data and it will be revealed that Indian equity markets have become progressively more volatile and the rupee continues to be vulnerable. Faced with a widening CAD at 6.57 % of the GDP as on Dec 2012, the government has come out with a slew of measures to arrest the slide -Regulations are being streamlined, FDI caps have been revised, open doors for investment in almost all sectors, easing of FII norms by SEBI etc. This has been viewed very positively by the equity markets leading to a huge rally within two days from the oversold lows of 26th June 2013 indicating sustained interest in the India story. Yet with the earnings season round the corner, elections within an ear shot, equity markets could continue to be range bound in 5000- 7000 band on the Nifty providing better opportunities to invest.
On the debt front, with good monsoons a bumper crop is predicted, which in turn could lead to softening of food prices giving a further boost to low inflation caused by the global commodity prices. This would give the much required headroom for the RBI rate cut. With the European and Japanese easy money policy, it will not be effortless for the FED to taper QE as that would lead to further strengthening of the dollar. Between Jan to April this year, the Cabinet Committee on investments (CCI) has cleared 256 projects worth $27 bn. Inviting the SWFs for investment in infrastructure debt funds and mulling of issuance of NRI bonds is also on the cards but awaits appropriate timing .
Opportunities for NRI
While all this may spell doom for most, it is sweet music to the NRIs as a weakening rupee and dollar earnings is the best recipe to invest. It is certainly an opportune time to repay rupee debts (read education loans) but would it make sense to invest?
Real estate has already caught the fancy of many NRIs and with regulation in place, will make long term investments fruitful. Yet due to the liquidity issues, it may not be a preferred investment option for all. At the same time, banks are offering attractive rates for NRI deposits, which being tax free prove to be a good hedge for both inflation and to a certain extent the falling rupee.
What lies ahead?
One cannot say that the worst is over for the rupee. It may slide further to 62 or even 63. Analysts have expressed that the fair value for the rupee would be at 56-57 mark. So, a-wait-and-watch stance may end up missing on opportunities. Hence, it is best to invest in tranches as and when markets over react as it was seen last week. Apart from investing for themselves, the NRIs would have done a good turn to the Nation by bringing valuable foreign exchange – a win-win for all. At the end of the day, both the Indian equity and debt markets would continue to stay attractive to the FIIs.
- Anagha Hunnurkar
(The author is an investment professional from Mumbai. She is working as a Senior consultant in the area of wealth management and corporate advisory services.)