■ Trade deficit shrinking in India, expanding in other EMs: INR has been
the weakest EM currency since talk of the taper started. This has been
attributed to India's high CAD, but there has been no correlation between the
fall in an EM currency and the country's CAD. In fact, India stands out in that
its trade deficit shrunk sharply between May and August, but it widened for
most other EMs. This should have meant the rupee does better than others.
■ Could India have been Current Account Surplus in August? With August
trade deficit likely below $10.5 bn, accelerating "invisibles" (i.e., remittances
and software exports) could have driven a monthly current account surplus.
Gold imports being zero for the month helped, but so did falling imports of oil
(demand falls whenever government cuts subsidies), capital goods (sharp
slowdown in investment demand), fertilizer (lower prices) and metals. Some
were due to falling demand, some others due to price declines, and the rest
due to import substitution. Rising exports (metals, textiles, etc) helped too.
■ INR stability to be followed by appreciation: Gold imports cannot stay at
zero, and oil prices are rising again. But it is now clear that directionally we
are headed for a sharp reduction in the CAD. A $35bn CAD can be funded
by just FDI and NRI deposits, both of which are holding up. The rupee's fall
was due to fear: a period of stability should thus be followed by strong
appreciation as the fear trade reverses. We would use the rally in banks to
trim positions and not add, and buy IT, Pharma, RIL, Bajaj Auto and Bharti.
��
the weakest EM currency since talk of the taper started. This has been
attributed to India's high CAD, but there has been no correlation between the
fall in an EM currency and the country's CAD. In fact, India stands out in that
its trade deficit shrunk sharply between May and August, but it widened for
most other EMs. This should have meant the rupee does better than others.
■ Could India have been Current Account Surplus in August? With August
trade deficit likely below $10.5 bn, accelerating "invisibles" (i.e., remittances
and software exports) could have driven a monthly current account surplus.
Gold imports being zero for the month helped, but so did falling imports of oil
(demand falls whenever government cuts subsidies), capital goods (sharp
slowdown in investment demand), fertilizer (lower prices) and metals. Some
were due to falling demand, some others due to price declines, and the rest
due to import substitution. Rising exports (metals, textiles, etc) helped too.
■ INR stability to be followed by appreciation: Gold imports cannot stay at
zero, and oil prices are rising again. But it is now clear that directionally we
are headed for a sharp reduction in the CAD. A $35bn CAD can be funded
by just FDI and NRI deposits, both of which are holding up. The rupee's fall
was due to fear: a period of stability should thus be followed by strong
appreciation as the fear trade reverses. We would use the rally in banks to
trim positions and not add, and buy IT, Pharma, RIL, Bajaj Auto and Bharti.
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