Spectacular Rise of Rupee Amidst Weak Leadership

After touching an all-time low of 68.80 on 28 August 2013, the Indian rupee has resurrected miraculously to 63.48 by 13Sep2013 against the US dollar. The amazing upsurge of rupee by almost eight per cent in just a matter of two weeks has been attributed to various reasons. In this backdrop, let me try to dig deeper and come out with my own theory.  

As explained simply in the above graph, various reasons could be attributed to the rise of rupee in the last two weeks. All these things, we’re able to tell with the benefit of hindsight. If you’d asked the finance minister P.Chidambaram what went right with the rupee, he would have smiled very confidently and responded by saying that “I told you so!” If you’d asked the so-called market experts they would say it was the “Rajan Effect.”

It was global factors such as oil prices cooling off following the US postponing its potential attack on Syria, others would argue. Some even attributed rupee’s recovery to India’s trade deficit easing a bit in August 2013. The overwhelming rise in Indian stock markets too helped the rupee gaining ground; and in fact the reverse is also true! Global markets too have rallied smartly last week. Media headlines often don’t tell the full story.

The “Rajan Effect”:

Upon taking over as RBI governor, Raghuram G Rajan announced a raft of measures—which inter alia include, fast tracking issue of new bank licences, window for banks for swapping FCNR (B) deposits, and freeing bank branch licensing. The speed with the new governor has acted has positively surprised the markets. The rupee strengthened and the stock markets soared. It remains to be seen how long this optimism lasts.

The RBI may have definitely intervened in August this year also, by selling dollars and propping up the rupee. Between May and July this year, RBI sold US dollars worth $8.34 billion in the foreign exchange market. The August figures will be known next month. RBI’s foreign exchange reserves are $275 billion, down $17 billion since Mar2013 end.

See my piece: What to Expect from Raghuram Rajan?-04Sep2013:

http://ramakrishnavadlamudi.blogspot.in/2013/09/what-to-expect-from-raghuram-rajan.html

Syrian Crisis on the Mend:

The US was planning to attack Syria a few weeks back. The US has now postponed that plan after Russia intervened in the matter. Russia has proposed a plan to put Syria’s chemical weapons under international control. It was earlier feared by the markets that any US attack on Syria would spread Syria’s bloody conflict to the entire middle-east, jeopardizing the prospects of global economy.

An internal war has been going on in Syria for more than two years between President Assad’s government forces and rebels; the latter are supported by several western nations. Reports indicate that chemical weapons were used last month in Syria killing hundreds of people. The United Nations is investigating the matter. Since 2011, more than 100,000 people have been killed and 2 million have been displaced.

RBI-BOJ Bilateral Swap Arrangement (BSA):

On Sep62013, Reserve Bank of India and Bank of Japan decided to increase their bilateral swap arrangement (BSA) from USD15 billion to USD50 billion. This facility enables both nations to swap Japanese yen or the Indian rupee for US dollars in emergency situations. It irons out short-term liquidity difficulties for India and Japan. The BSA is expected to lend stability in financial markets. In fact, the increase in the facility has boosted the confidence and partly contributed to rupee’s appreciation against the dollar. The BSA was first signed in 2008 for $3 billion, but was later increased to $15 billion in December 2012 when the facility was renewed for a three-year period.  

 RBI’s Swap Window for OMCs

The Reserve Bank on 28Aug2013 offered a temporary swap window facility for public sector oil market companies (IOC, HPCL and BPCL) to enable them to buy or sell US dollars. With this, OMCs are out of the foreign exchange market reducing the dollar demand. The OMCs’ demand per month is said to be around $9 billion.

 To Sum Up:

We can’t definitely point out the real reasons behind the rupee’s rise. It could be a combination of factors—wild swings in investor sentiment, the slew of measures announced by the RBI, FIIs coming back to India once stocks become cheaper, OMCs going out of the foreign exchange market or some factors unknown to us!

The fact of the matter is: We don’t know for sure. It’s in the nature of markets to swing between moods of downright pessimism and lofty exuberance. As George Soros put it in his book The Alchemy of Finance: “The stock market is generally believed to be anticipating recessions; but it would be more correct to say that it can help to precipitate them. Markets are always biased in one direction or other. Markets can influence the events that they anticipate. Markets have a way of making predictions come true!”  

Where is Rupee Headed in the Midst of a Weak Leadership?

India’s growth will depend on external and internal factors. However, it’ll be more of the latter. The latest quarterly gross domestic product (GDP) growth of 4.4 per cent is far from flattering. Manufacturing sector is down in the dumps. Rating agency Crisil has warned that services sector growth may slump to 6.5 per cent in 2013-14, bringing down the overall growth rate to 4.8 per cent, which will be a decade’s low. Demand slowdown in the economy may negatively impact two of three sectors, reducing their revenues.

Crisil has cautioned that the collapse of the investment cycle will hamper infrastructure, capital goods, automobile and real estate sectors. Highly-indebted companies will suffer more, with tight liquidity, stretched working capital cycles and increased interest burden. Crisil has further stated that rupee depreciation will help IT-ITES, pharmaceutical, textile, garment and other sectors, easing the current account deficit. Agriculture growth may improve to 4.5 per cent, easing food prices and supporting rural consumption.

Fiscal deficit may not be under control in the pre-election year. What India lacks is effective leadership. This has seriously undermined public institutions. Nobody seems to take any responsibility or accountability. If you ask the prime minister, he is putting the onus on global factors. If you ask the finance minister P Chidambaram, he’s pointing out the fingers at ex-finance minister. But the newly-retired RBI governor D Subbarao squarely blamed the central government for the current economic conditions. But who are the real culprits, you may wonder. I could say each one of them and some more (f)actors.

A noted economist Bibek Debroy recently tweeted: “Domestic actors not domestic factors are responsible (must be a typo).”

The fate of Indian rupee largely hinges on the fortunes of Indian economy. Of course, we can’t rule out global factors also. The rupee will continue to be volatile driven by external and internal factors. Some sense seems to have come to the rupee market in the last two weeks. While the positive sentiment may continue in the short-term, it’ll be back to basics in the medium to long term. Crisil has said that the rupee may rebound to 60 per dollar by March 2014. I tend to go with that figure, with plus or minus two.

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Related Articles:

India’s GDP Growth Slows-10Sep2013:

http://ramakrishnavadlamudi.blogspot.in/2013/09/india-gdp-growth-slows-vrk100-10sep2013.html

Strengths and Weakness of Indian Economy-01Sep2013:

http://ramakrishnavadlamudi.blogspot.in/2013/09/indian-economys-strengths-and.html

Recognition of Good Governance by PM-15Sep2012:

http://ramakrishnavadlamudi.blogspot.in/2012/09/the-recognition-of-good-governance-by.html

Disclaimer: The author is an investment analyst, equity investor and freelance writer. This write-up is for information purposes only and should not be taken as investment advice. Investors are advised to consult their financial advisor before taking any investment decisions. These are personal his views. He blogs at:

http://ramakrishnavadlamudi.blogspot.in/

http://www.scribd.com/vrk100

Connect with him on twitter @vrk100

Good News for India's Power Consumers-VRK100-20Dec2012

Some Good News for India’s 
Power Consumers in 2013!

From Free Power to No Power!

Before I share the good news with you, let me put some facts before you. Riding on the promise of free power to farmers, the Congress party came back to power in the state of Andhra Pradesh in 2004. Today, the state has been reeling under continuous power deficit due to a variety of reasons. What a transition from free power to no power! Most of the AP farmers, businessmen and other citizens now get interrupted supply of power that too only for a few hours, throwing their daily activities out of gear.

This AP model has since been followed by politicians in other states, with varying degrees of success. Many more politicians will continue to promise free power in future.

When it comes to retaining or attaining power, Indian politicians are very smart. Of late, they have started promising free laptops/tablets to students. But with no electricity supply, how will students use these “free” laptops? May be on herbal fuel, as promised by the infamous Ramar Pillai a few decades back. In future, our politicians may offer Apple tablets (tablet computers) as freebies, who knows!

Crashing Down and Sprinting Backwards:

A few weeks back, the Government of India had tossed, in a cavalier way, a fresh crumb of Rs 2,000 crores to Air India, which has been bleeding internally – I don’t know for how many years. The state-owned Air India was once the dominant airliner in India but now its place has slipped to third or fourth due to intense competition. Air India has been on a perpetual life-support system and I hope the situation will continue in future also.

Competing with Air India are other public sector telecom companies, such as, BSNL and MTNL – sprinting towards intensive care unit (ICU). In the last five years, BSNL (Bharat Sanchar Nigam Ltd) has come down from first place to fifth place now – being dethroned by the likes of Bharti Airtel, Vodafone and Idea Cellular.

Public sector oil marketing companies, IOC, BPCL and HPCL too have been making huge losses, due to very high subsidies on diesel, LPG and kerosene. And we’ve forgotten about their losses. These OMCs have not been able to make fresh investments in capacities/refineries or new exploration – negatively impacting India’s energy security.

Indian banks, mostly state-owned ones, too may eventually and inevitably suffer big losses on account of their loan exposure to such public sector companies with suspect fundamentals – technically they may not lose money due to the perception that some of the loans enjoy sovereign guarantee from the governments. But we never know for sure.

  

Restructuring or Bankruptcy?

Let us turn our attention to the financial situation of our state power distribution companies or Discoms or state electricity boards (SEBs), owned by state governments. The following is a quote from a Reserve Bank of India report of October 2012:

“Distribution of power has come under financial stress, with state power distribution companies (Discoms) sitting on an accumulated debt of  Rs 1,90,000 crores as on March 2011. A large amount of bank finance is stuck in bad loans to these Discoms.”

The accumulated losses of Discoms are Rs 2,46,000 crores. In September 2012, the Government of India announced a debt restructuring package for these Discoms. My feeling is that this debt restructuring is just a disguise for prolonging bankruptcy.

Creative Resurrection:

One of the established tenets of capitalism (of course, we say we are a socialist republic – which is mere nonsense) is creative destruction – but in India, we have made a strong foundation for the concept of “creative resurrection” – anything can be resurrected and the resurrection process will continue for decades and centuries!

Skills Deficit:

One of the reasons for India’s inability to increase productivity is skills deficit in critical areas. Leave out critical areas, we seem to be short of miners also. Because Coal India has been unable to mine coal necessary for power-generation companies. This year India’s coal shortage seems to be in the range of 20 percent, and the deficit is being filled through costlier imported coal – losing precious foreign exchange in the disorder.

Crores of Indians suffered heavily at the end of July 2012 due to a power blackout in India, described by the media as the worst-ever in India’s history.

Finally, the Good News!

When people are in distress, human bondage will improve. We will come out of our cocoons and share our miseries with our neighbours. And we will talk more on our mobile phones (provided the battery does not run out due to lack of power supply). This is the silver lining. And revenues for telecom service companies will increase.

The final good news for India’s power consumers in 2013 is that our power bills may come down drastically in many states, because the state governments are expected to be unable to supply electricity to consumers!

P.S.: The author in an independent investment analyst. His views are personal. The opinions expressed in this article are with malice toward Indian politicians.

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