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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Economy
Currency
FX conference call with Mr. A.V. Rajwade. The tone of the call was clearly that of a
depreciating bias for INR. The domestic and the global scenarios along with most
economic indicators are non-supportive of any sustainable appreciating bias. The
domestic concerns now are as important as the global concerns and will be
instrumental in the movement of the INR. The situation in Euro area is unlikely to have
any quick fix and a wave of risk aversion is likely to be the dominant theme in the
current environment.
Most indicators hint at Rupee depreciation
Domestic and external scenarios both have been instrumental in keeping up the depreciating bias
in the economy. The call suggested that domestic concerns are now as important as the global
issues of risk aversion. India’s growth has been slowing and is reflected in the slowing IIP growth.
The current account deficit (CAD) has increased to ~US$45 bn in FY2011 from US$10 bn in
FY2007. This has been significantly contributed by the widening trade deficit that, according to
Mr. Rajwade, is attributable to decreasing export competitiveness for India. He views the recent
sharp increase in exports as a fallout of exporters speeding up to take advantage of the DEPB
scheme. The DEPB scheme will be replaced by end-September 2011. Thus, the pace of export
growth is likely to dip significantly going forward, even in light of the deterioration in growth
dynamics globally. The global scenario has also led to an environment of risk aversion indicated by
the drop in US treasury yields even after the US downgrade.
Global rumblings to continue
Mr. Rajwade views the Euro crisis to be a prolonged one. The view is essentially of much pain still
to come as countries like Greece having to take strict measures to reduce the fiscal problem. As in
a democracy this would entail political turmoil associated with social unrest which would prolong
the crisis further. Without growth coming back it is unlikely that Euro area will come out of the
debt crisis situation anytime soon. Growth on the other hand will be elusive given the lack of any
kind of fiscal stimulus, and monetary push from the ECB unlikely to have the same effect. US is
also likely to be in a low-growth situation with fiscal imbalances continuing to rear up from time to
time. With the developed economies growth not picking up anytime soon, India’s trade may suffer
and along with a slowing economy may compound the problem.
Capital flows have become important
With CAD widening, the capital flows have assumed much more importance. In this round of
depreciation, RBI had stayed out of intervention as it had been doing in most of the recent
occasions. Previously RBI used to intervene in a band of 4-5% of REER but that has been given up
in the recent past. Intervention would also have led to a fall in Rupee liquidity too, which would
have put additional pressure on the companies to secure funds. On-the-ground evidence indicates
that corporate houses (importers to be more specific) could be facing issues in rolling over their
short-term debt. Foreign flows, especially FDI and FII flows, have dried up. According to Mr.
Rajwade, the lack of governance, law enforcement and business environment issues could be
principal reasons for this. From a BOP perspective, there are emerging risks on the capital account
flows and thus, with flows into the economy also drying up, scope for any appreciation bias for
the currency is getting limited.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Economy
Currency
FX conference call with Mr. A.V. Rajwade. The tone of the call was clearly that of a
depreciating bias for INR. The domestic and the global scenarios along with most
economic indicators are non-supportive of any sustainable appreciating bias. The
domestic concerns now are as important as the global concerns and will be
instrumental in the movement of the INR. The situation in Euro area is unlikely to have
any quick fix and a wave of risk aversion is likely to be the dominant theme in the
current environment.
Most indicators hint at Rupee depreciation
Domestic and external scenarios both have been instrumental in keeping up the depreciating bias
in the economy. The call suggested that domestic concerns are now as important as the global
issues of risk aversion. India’s growth has been slowing and is reflected in the slowing IIP growth.
The current account deficit (CAD) has increased to ~US$45 bn in FY2011 from US$10 bn in
FY2007. This has been significantly contributed by the widening trade deficit that, according to
Mr. Rajwade, is attributable to decreasing export competitiveness for India. He views the recent
sharp increase in exports as a fallout of exporters speeding up to take advantage of the DEPB
scheme. The DEPB scheme will be replaced by end-September 2011. Thus, the pace of export
growth is likely to dip significantly going forward, even in light of the deterioration in growth
dynamics globally. The global scenario has also led to an environment of risk aversion indicated by
the drop in US treasury yields even after the US downgrade.
Global rumblings to continue
Mr. Rajwade views the Euro crisis to be a prolonged one. The view is essentially of much pain still
to come as countries like Greece having to take strict measures to reduce the fiscal problem. As in
a democracy this would entail political turmoil associated with social unrest which would prolong
the crisis further. Without growth coming back it is unlikely that Euro area will come out of the
debt crisis situation anytime soon. Growth on the other hand will be elusive given the lack of any
kind of fiscal stimulus, and monetary push from the ECB unlikely to have the same effect. US is
also likely to be in a low-growth situation with fiscal imbalances continuing to rear up from time to
time. With the developed economies growth not picking up anytime soon, India’s trade may suffer
and along with a slowing economy may compound the problem.
Capital flows have become important
With CAD widening, the capital flows have assumed much more importance. In this round of
depreciation, RBI had stayed out of intervention as it had been doing in most of the recent
occasions. Previously RBI used to intervene in a band of 4-5% of REER but that has been given up
in the recent past. Intervention would also have led to a fall in Rupee liquidity too, which would
have put additional pressure on the companies to secure funds. On-the-ground evidence indicates
that corporate houses (importers to be more specific) could be facing issues in rolling over their
short-term debt. Foreign flows, especially FDI and FII flows, have dried up. According to Mr.
Rajwade, the lack of governance, law enforcement and business environment issues could be
principal reasons for this. From a BOP perspective, there are emerging risks on the capital account
flows and thus, with flows into the economy also drying up, scope for any appreciation bias for
the currency is getting limited.
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