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Economy
Currency
USD/INR—worsening fundamentals to weigh on the Rupee. The rapidity with
which the USD/INR has depreciated over the past 2 months has been surprising. More
recent trends in the Indian Rupee indicate that the domestic currency continues to react
strongly to negative news flows, while moving only modestly to positive news. We
expect the ongoing global uncertainty as well as worsening domestic growth
fundamentals to weigh on the Rupee in the coming year. The USD/INR is likely to trade
in the 48.00-51.00 range in 2HFY12E, averaging 49.25 during this time. We expect
USD/INR to remain under pressure and average 49.75 in FY2013E.
Rupee lags behind its Asian peers
The Indian Rupee has been the worst performer within the Asian currency block, depreciating by a
sharp 11.7% since August. To an extent, the domestic unit’s weakness is a result of safe-haven
flows into the Dollar. The greenback has gained sharply during this time on its safe-haven appeal,
as first global growth slowdown fears and then Greek default worries led to the heightened risk
aversion. To add to the weak global cues, the deteriorating domestic fundamentals further
accentuated the upward move in USD/INR. Besides the fragile global risk appetite, concerns of a
hard landing for the Indian economy have affected capital inflows. This together with importrelated
Dollar demand created a cash Dollar shortage in the onshore FX market, and pushed
USD/INR above the 50.00 levels.
Domestic fundamentals to remain weak in the coming year
In FY2011, the Indian economy was hailed for its resilience and strong domestic fundamentals.
However, FY2012E is turning out to be a completely different story for the Indian economy. The
lack of progress on key reforms, the numerous scams and a worsening fiscal-monetary policy mix
have dented the confidence in the Indian economy. We do not expect the policy environment in
India to improve materially in the coming year. We believe that FY2013E could continue to be a
challenging year for the Indian economy. This would manifest itself in lower capital inflows and a
depreciated currency as confidence in the Indian economy remains poor.
Balance of payments risks shifting to the capital account
In FY2012E, we expect the current account deficit to remain in excess of 3% of GDP as a weaker
Rupee drives up the import bill while exports lose their shine on waning global demand. On the
capital account side, both pull and push factors appear to be missing given the deteriorating
domestic and global fundamentals. We expect the overall balance of payments for FY2012E at
US$4.5 bn. We do not expect any drastic change in BoP dynamics in FY2013E, and expect the
overall surplus on the BoP at US$6.7 bn in FY2013E. The modest BoP surplus would manifest itself
in a locked range for USD/INR with limited scope of any appreciation.
Dollar to gain from its safe-haven appeal
The EU Summit on October 26, 2011 addressed some of the key issues facing the Euro zone, but
fell short on details. While the Euro bounced off sharply following the Summit, we expect these
gains to be temporary. Going forward, we expect the Euro to come under renewed pressure on
narrowing interest rate differentials. ECB will have to cut its policy rate down the road as the
current sovereign debt crisis and the risk of a banking crisis pose the risk of a mild recession in the
region. In the last ECB policy review, some ECB governing council members were in favor of a rate
cut. Additionally, we do not expect the latest measures to be a panacea for the ongoing sovereign
debt problems in the region. Thus sovereign and banking sector stress would be another source of
weakness for the Euro. We expect EUR/USD to head lower and average 1.32 in 2HFY12E
Indian Rupee—worsening fundamentals to weigh on the currency
Since our last currency report on September 22 (‘INR could witness further depreciation
bias‘), the Indian Rupee has definitely shown depreciation bias with negative global news
and also in line with the global FX trends during these times. However, it has significantly
failed to show any bias for appreciation in situations of improving risk environment and a
consequent depreciation of the USD. In light of this, it is becoming more apparent that
besides the global uncertainty, which has and will continue to play a major role in
determining INR trends, the worsening domestic growth fundamentals have also been
weighing on the domestic currency.
We expect that the bias for Dollar appreciation as a safe-haven currency and also due to ECB
rate cuts is building up strongly. This and headwinds from the weakening domestic
fundamentals are expected to keep the USD/INR on a depreciation bias. We thus expect
USD/INR to trade in the 48.00-51.00 range in 2HFY12E. Further, we expect the USD/INR to
remain under pressure in FY2013E and average 49.75 for the year.
We had highlighted in the September 22 comment the possibility of USD/INR breaching the
50.00 mark in the near term and thereafter testing the previous high of 52.20. Our view has
played out as USD/INR touched an intra-day high of 50.32 on October 21, 2011 before
ending the day at 50.03. However, at the time of our last report, we were also of the view
that this upside to USD/INR would prove to be temporary and USD/INR would eventually
settle in the 46.00-49.00 range in 2HFY12E. This was based on our expectations that Greece
default concerns would ease boosting global risk appetite.
USD/INR move—a rewind
The Indian Rupee has been the worst performer within the Asian currency block,
depreciating by a sharp 11.7% since August with the swiftness and the rapidity of the
depreciation especially surprising. The Rupee weakness in early August was largely in line
with the trends in the global FX markets, as first the US debt ceiling impasse and then the
US downgrade led to a marked deterioration in risk appetite. With investors flocking into
safe-haven assets such as Dollar, Swiss Franc and Yen, emerging market asset classes
declined, and their currencies weakened.
In the latter part of August, INR depreciated sharply, in contrast to the appreciation trends in
the other Asian currencies. This was in part due to the bunching up of Dollar demand in
relation to the Iran oil payments. Thus, despite the rally in domestic equities as also global
Dollar weakness during this time, the Rupee remained under pressure. Though it was
anticipated that as this demand eases out, USD/INR would return to its earlier levels, the
domestic currency pair not only remained at elevated levels but headed further north. The
sustenance of this upward pressure on USD/INR came after a key support level (45.80) was
broken, also coinciding with news of Dollar demand by Indian corporate in onshore market.
Since the beginning of September, the trends in the Indian Rupee have fallen in line with
those in the global FX markets. Fears of a Greece default came back on the radar after the
country missed its deficit target and put to jeopardy the release of the EU/IMF bailout
tranche. However, Rupee moves have been more exaggerated, as INR depreciated sharply
on negative news flows but appreciated only modestly on positive news flows. This was
possibly on account of deteriorating domestic fundamentals, and concerns of a sharp
slowdown and a brewing fiscal problem, which pushed USD/INR above the 50.00 levels.
Waning domestic fundamentals a risk for USD/INR
In FY2012E confidence in the Indian economy has been waning. Initially, scams and
corruption issues dented sentiment. Further, the lack of progress on key reforms and a
worsening fiscal-monetary policy mix have dented the confidence in the Indian economy and
led to fears of a hard landing. We do not expect the policy environment in India to improve
in any material fashion in the coming year. Even as the domestic policy interest rates have
peaked, a downward trend looks unlikely until mid-FY2013E as we expect inflation to
remain above RBI’s comfort zone (4-6%) until then. Additionally, progress on fiscal
consolidation is likely to be far from desirable, as we do not expect any progress on key
reforms such as the GST and administered fuel prices deregulation. All this could manifest in
lower capital inflows and a depreciated currency as confidence in the Indian economy
remains poor.
Balance of payments to be in surplus but risks shifting to the capital account
In our view, the overall balance of payments trends in FY2012E are also unlikely to be
supportive of the domestic currency. In 1QFY12, capital inflows were healthy at US$20.9 bn,
which after covering the US$14.2 bn deficit on the current account, led to a US$5.4 bn
surplus on the BoP. However, we do not expect the remaining quarters of FY2012E to show
significant strengths on the capital flows, thereby leading to a bias for the USD/INR to
depreciate.
India’s merchandise trade deficit has widened from an average of US$10.5 bn in 1QFY12 to
US$11.6 bn in 2QFY12 as per DGCI&S data. However, FII inflows have slowed, with total
flows since July at US$1.5 bn against US$1.8 bn in 1QFY12. Given the heightened risk
aversion from August onwards and the Dollar shortage in the domestic FX market, it is quite
likely that capital inflows from other sources have also been subdued during this period.
In the remaining of FY2012E, we expect the recent strong momentum in exports to give
way as global demand weakens. There is already evidence of this, with monthly merchandise
exports coming down to US$24.9 bn in September 2011 from around US$29 bn in June-July
2011. Further, the close to 12.6% depreciation in INR on a FYTD basis is likely to drive up
the import bill. We thus see the trade balance widen to 8.3% of GDP in FY2012E from
7.6% of GDP in FY2011. On the capital account side, both pull and push factors appear to
be missing given the deteriorating domestic and global fundamentals. We expect the overall
balance of payments for FY2012E at US$4.5 bn. In FY2013E, we expect the BoP to exhibit
more or less similar trends and look for the total surplus on the BoP at US$6.7 bn.
The risks to the BoP for FY2013E, in our view, are mainly on the capital account. This is a
marked departure from FY2012E where the risks were mainly concentrated on the current
account in the form of a widening trade gap on account of rising crude oil prices. Going
forward, there is no clarity on the effectiveness of the current policy directions to save
Greece from defaulting. In the event of a default, the risk aversion is likely to aggravate
significantly, leading to safe-haven demand for USD. The other risk could be in the form of
lower FDI and ECB, mainly due to the waning fundamentals of the domestic and global
economy.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Economy
Currency
USD/INR—worsening fundamentals to weigh on the Rupee. The rapidity with
which the USD/INR has depreciated over the past 2 months has been surprising. More
recent trends in the Indian Rupee indicate that the domestic currency continues to react
strongly to negative news flows, while moving only modestly to positive news. We
expect the ongoing global uncertainty as well as worsening domestic growth
fundamentals to weigh on the Rupee in the coming year. The USD/INR is likely to trade
in the 48.00-51.00 range in 2HFY12E, averaging 49.25 during this time. We expect
USD/INR to remain under pressure and average 49.75 in FY2013E.
Rupee lags behind its Asian peers
The Indian Rupee has been the worst performer within the Asian currency block, depreciating by a
sharp 11.7% since August. To an extent, the domestic unit’s weakness is a result of safe-haven
flows into the Dollar. The greenback has gained sharply during this time on its safe-haven appeal,
as first global growth slowdown fears and then Greek default worries led to the heightened risk
aversion. To add to the weak global cues, the deteriorating domestic fundamentals further
accentuated the upward move in USD/INR. Besides the fragile global risk appetite, concerns of a
hard landing for the Indian economy have affected capital inflows. This together with importrelated
Dollar demand created a cash Dollar shortage in the onshore FX market, and pushed
USD/INR above the 50.00 levels.
Domestic fundamentals to remain weak in the coming year
In FY2011, the Indian economy was hailed for its resilience and strong domestic fundamentals.
However, FY2012E is turning out to be a completely different story for the Indian economy. The
lack of progress on key reforms, the numerous scams and a worsening fiscal-monetary policy mix
have dented the confidence in the Indian economy. We do not expect the policy environment in
India to improve materially in the coming year. We believe that FY2013E could continue to be a
challenging year for the Indian economy. This would manifest itself in lower capital inflows and a
depreciated currency as confidence in the Indian economy remains poor.
Balance of payments risks shifting to the capital account
In FY2012E, we expect the current account deficit to remain in excess of 3% of GDP as a weaker
Rupee drives up the import bill while exports lose their shine on waning global demand. On the
capital account side, both pull and push factors appear to be missing given the deteriorating
domestic and global fundamentals. We expect the overall balance of payments for FY2012E at
US$4.5 bn. We do not expect any drastic change in BoP dynamics in FY2013E, and expect the
overall surplus on the BoP at US$6.7 bn in FY2013E. The modest BoP surplus would manifest itself
in a locked range for USD/INR with limited scope of any appreciation.
Dollar to gain from its safe-haven appeal
The EU Summit on October 26, 2011 addressed some of the key issues facing the Euro zone, but
fell short on details. While the Euro bounced off sharply following the Summit, we expect these
gains to be temporary. Going forward, we expect the Euro to come under renewed pressure on
narrowing interest rate differentials. ECB will have to cut its policy rate down the road as the
current sovereign debt crisis and the risk of a banking crisis pose the risk of a mild recession in the
region. In the last ECB policy review, some ECB governing council members were in favor of a rate
cut. Additionally, we do not expect the latest measures to be a panacea for the ongoing sovereign
debt problems in the region. Thus sovereign and banking sector stress would be another source of
weakness for the Euro. We expect EUR/USD to head lower and average 1.32 in 2HFY12E
Indian Rupee—worsening fundamentals to weigh on the currency
Since our last currency report on September 22 (‘INR could witness further depreciation
bias‘), the Indian Rupee has definitely shown depreciation bias with negative global news
and also in line with the global FX trends during these times. However, it has significantly
failed to show any bias for appreciation in situations of improving risk environment and a
consequent depreciation of the USD. In light of this, it is becoming more apparent that
besides the global uncertainty, which has and will continue to play a major role in
determining INR trends, the worsening domestic growth fundamentals have also been
weighing on the domestic currency.
We expect that the bias for Dollar appreciation as a safe-haven currency and also due to ECB
rate cuts is building up strongly. This and headwinds from the weakening domestic
fundamentals are expected to keep the USD/INR on a depreciation bias. We thus expect
USD/INR to trade in the 48.00-51.00 range in 2HFY12E. Further, we expect the USD/INR to
remain under pressure in FY2013E and average 49.75 for the year.
We had highlighted in the September 22 comment the possibility of USD/INR breaching the
50.00 mark in the near term and thereafter testing the previous high of 52.20. Our view has
played out as USD/INR touched an intra-day high of 50.32 on October 21, 2011 before
ending the day at 50.03. However, at the time of our last report, we were also of the view
that this upside to USD/INR would prove to be temporary and USD/INR would eventually
settle in the 46.00-49.00 range in 2HFY12E. This was based on our expectations that Greece
default concerns would ease boosting global risk appetite.
USD/INR move—a rewind
The Indian Rupee has been the worst performer within the Asian currency block,
depreciating by a sharp 11.7% since August with the swiftness and the rapidity of the
depreciation especially surprising. The Rupee weakness in early August was largely in line
with the trends in the global FX markets, as first the US debt ceiling impasse and then the
US downgrade led to a marked deterioration in risk appetite. With investors flocking into
safe-haven assets such as Dollar, Swiss Franc and Yen, emerging market asset classes
declined, and their currencies weakened.
In the latter part of August, INR depreciated sharply, in contrast to the appreciation trends in
the other Asian currencies. This was in part due to the bunching up of Dollar demand in
relation to the Iran oil payments. Thus, despite the rally in domestic equities as also global
Dollar weakness during this time, the Rupee remained under pressure. Though it was
anticipated that as this demand eases out, USD/INR would return to its earlier levels, the
domestic currency pair not only remained at elevated levels but headed further north. The
sustenance of this upward pressure on USD/INR came after a key support level (45.80) was
broken, also coinciding with news of Dollar demand by Indian corporate in onshore market.
Since the beginning of September, the trends in the Indian Rupee have fallen in line with
those in the global FX markets. Fears of a Greece default came back on the radar after the
country missed its deficit target and put to jeopardy the release of the EU/IMF bailout
tranche. However, Rupee moves have been more exaggerated, as INR depreciated sharply
on negative news flows but appreciated only modestly on positive news flows. This was
possibly on account of deteriorating domestic fundamentals, and concerns of a sharp
slowdown and a brewing fiscal problem, which pushed USD/INR above the 50.00 levels.
Waning domestic fundamentals a risk for USD/INR
In FY2012E confidence in the Indian economy has been waning. Initially, scams and
corruption issues dented sentiment. Further, the lack of progress on key reforms and a
worsening fiscal-monetary policy mix have dented the confidence in the Indian economy and
led to fears of a hard landing. We do not expect the policy environment in India to improve
in any material fashion in the coming year. Even as the domestic policy interest rates have
peaked, a downward trend looks unlikely until mid-FY2013E as we expect inflation to
remain above RBI’s comfort zone (4-6%) until then. Additionally, progress on fiscal
consolidation is likely to be far from desirable, as we do not expect any progress on key
reforms such as the GST and administered fuel prices deregulation. All this could manifest in
lower capital inflows and a depreciated currency as confidence in the Indian economy
remains poor.
Balance of payments to be in surplus but risks shifting to the capital account
In our view, the overall balance of payments trends in FY2012E are also unlikely to be
supportive of the domestic currency. In 1QFY12, capital inflows were healthy at US$20.9 bn,
which after covering the US$14.2 bn deficit on the current account, led to a US$5.4 bn
surplus on the BoP. However, we do not expect the remaining quarters of FY2012E to show
significant strengths on the capital flows, thereby leading to a bias for the USD/INR to
depreciate.
India’s merchandise trade deficit has widened from an average of US$10.5 bn in 1QFY12 to
US$11.6 bn in 2QFY12 as per DGCI&S data. However, FII inflows have slowed, with total
flows since July at US$1.5 bn against US$1.8 bn in 1QFY12. Given the heightened risk
aversion from August onwards and the Dollar shortage in the domestic FX market, it is quite
likely that capital inflows from other sources have also been subdued during this period.
In the remaining of FY2012E, we expect the recent strong momentum in exports to give
way as global demand weakens. There is already evidence of this, with monthly merchandise
exports coming down to US$24.9 bn in September 2011 from around US$29 bn in June-July
2011. Further, the close to 12.6% depreciation in INR on a FYTD basis is likely to drive up
the import bill. We thus see the trade balance widen to 8.3% of GDP in FY2012E from
7.6% of GDP in FY2011. On the capital account side, both pull and push factors appear to
be missing given the deteriorating domestic and global fundamentals. We expect the overall
balance of payments for FY2012E at US$4.5 bn. In FY2013E, we expect the BoP to exhibit
more or less similar trends and look for the total surplus on the BoP at US$6.7 bn.
The risks to the BoP for FY2013E, in our view, are mainly on the capital account. This is a
marked departure from FY2012E where the risks were mainly concentrated on the current
account in the form of a widening trade gap on account of rising crude oil prices. Going
forward, there is no clarity on the effectiveness of the current policy directions to save
Greece from defaulting. In the event of a default, the risk aversion is likely to aggravate
significantly, leading to safe-haven demand for USD. The other risk could be in the form of
lower FDI and ECB, mainly due to the waning fundamentals of the domestic and global
economy.
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