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EM currencies (including INR) have tumbled sharply in recent times as the
EU debt crisis escalated. The intensity of correction is surprising and is in
contrast to their behavior during Apr‐Jun 2010 period when signs of EU
crisis first surfaced. In our view, the key differentiating factor this time is
the sharp spike in inter‐bank stress in Europe (Euribor‐OIS spread
widened sharply). Notably, EU banks account for ~55% of the total foreign
claims on EM Asia and India (~at USD 160 bn) is no exception to this.
While claims data for September is not yet available, we think that as the
EU crisis escalated in Aug‐Sept, EU banks began hoarding liquidity and
cutting exposures to EM thereby triggering a harsh fall in EM currencies ‐
similar to what was observed in late 2008. Notably, while EM currencies
recovered somewhat in Oct due to EU deal, INR bucked the trend, largely
reflecting widening current account deficit (CAD), with Oct trade balance
standing at an all time high of ~USD 20 bn.
Going ahead, India’s exports will slow down sharply in H2 and if the
recent trend in crude and gold imports continues, imports will remain
relatively resilient, causing the CAD to widen toward 3.2%‐3.3% of the
GDP in H2. Meanwhile, both equity and debt flows will likely remain
subdued. Given this weak BoP outlook, we believe that INR will remain
weak, averaging ~50 against USD in 2HFY12.
EM currencies exhibiting violent movements
The recent period saw sharp movements in currencies across EMs, with INR weakening
~10%, (BRL, KRW corrected even more) vs USD during Aug‐Sept period. While this is
apparently due to rise in global risk aversion amidst conflagration of EU debt crisis, the
intensity of the fall was clearly surprising. In fact in Apr‐June ’10, when EU debt
problems first emerged and EUR reacted violently, EM currencies incl. INR were far
more resilient (falling only marginally against USD but appreciating against EUR).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
EM currencies (including INR) have tumbled sharply in recent times as the
EU debt crisis escalated. The intensity of correction is surprising and is in
contrast to their behavior during Apr‐Jun 2010 period when signs of EU
crisis first surfaced. In our view, the key differentiating factor this time is
the sharp spike in inter‐bank stress in Europe (Euribor‐OIS spread
widened sharply). Notably, EU banks account for ~55% of the total foreign
claims on EM Asia and India (~at USD 160 bn) is no exception to this.
While claims data for September is not yet available, we think that as the
EU crisis escalated in Aug‐Sept, EU banks began hoarding liquidity and
cutting exposures to EM thereby triggering a harsh fall in EM currencies ‐
similar to what was observed in late 2008. Notably, while EM currencies
recovered somewhat in Oct due to EU deal, INR bucked the trend, largely
reflecting widening current account deficit (CAD), with Oct trade balance
standing at an all time high of ~USD 20 bn.
Going ahead, India’s exports will slow down sharply in H2 and if the
recent trend in crude and gold imports continues, imports will remain
relatively resilient, causing the CAD to widen toward 3.2%‐3.3% of the
GDP in H2. Meanwhile, both equity and debt flows will likely remain
subdued. Given this weak BoP outlook, we believe that INR will remain
weak, averaging ~50 against USD in 2HFY12.
EM currencies exhibiting violent movements
The recent period saw sharp movements in currencies across EMs, with INR weakening
~10%, (BRL, KRW corrected even more) vs USD during Aug‐Sept period. While this is
apparently due to rise in global risk aversion amidst conflagration of EU debt crisis, the
intensity of the fall was clearly surprising. In fact in Apr‐June ’10, when EU debt
problems first emerged and EUR reacted violently, EM currencies incl. INR were far
more resilient (falling only marginally against USD but appreciating against EUR).
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