Rupee was very volatile in F/Y 2011-2013 as it reached a high of 54.32. The key reason being large scale withdrawal of foreign portfolio flows from Indian stock exchanges due to European sovereign debt default woes and debt outflows by way of foreign currency convertible bonds (FCCB) redemptions, external commercial borrowing (ECB) among others. High crude oil import, gold imports and coal imports also added to rupee weakness. Inability of the UPA government to control its expenses resulted in budget deficit and a fundamentally weakness of Indian economy.
Food price inflation and continued rise in Urban cost of living jinxed Indians. The UPA government suffered election shocks in Uttar Pradesh and Punjab state assembly elections reflecting resentment of the UPA and its allies. Food price rise is an issue which the central government has to deal with else will continue with election defeats.
Government had increased custom duty on gold imports twice and on silver once in order to deter Indian from buying and investing in gold. They believe gold imports uses unnecessary foreign exchange and should be reduced to as minimum as possible. However the government has not responded to jewelery sector worker lay off and ways and means of re training them so that they can be reemployed in other industries.
The internal shock for the rupee is something which is under the control of the government. However every country need to get over external shocks which is hard to anticipate. The middle east and north African democratic moves could not be anticipated. European sovereign debt default woes continue to keep investors and world on a shaky ground. There is no magic wand for Europe to get over its economic woes. It seems that France and Germany control Europe and dictate its policies. Investors now know that Europe is not all about France and Germany and there is more in Europe. The global functioning suggests that USA, UK, France and Germany dictate most of the nation’s financial policies. These nations are the key arms exporters and have without any reasons attacked Iraq, Libya and other nations. Now when their economies are in deep shit their manipulation of other nation policies have failed. Their currencies no longer are safe havens. Investors and central banks diversified in a big way away from currencies into gold and other metals. This is the prime reason for gold price spike. In 2011 there was the US passing the budget issue also which also lent support to gold prices.
The key factors which will affect Rupee in F/Y 2012-2013
Political stability: Samajwadi party has called to be prepared for early mid term central elections. Rupee can weaken to 55.00 and 59.00 against the US dollar if there is mid term elections. Foreign investors only invest when there is a stable government and stable policies.
Stable policies: The Union budget for F/Y 2012-2012 has done nothing to control food price inflation and to increase consumption. Industrial growth without any substantial increase in retail spending will not last. The increase in service tax rates from ten percent to twelve percent will hurt everyone. The government thinks that India is still a rural country. The budget policies are aimed at rural growth which does not pay any taxes. The Urban Indian which pays taxes has found only higher cost of living in the budget. Even the country’s defence expenses have been increased by pea nuts which will get eaten over by defence inflation. The Indian defence policy is more import oriented and the efforts to involve the private sector so that there can be long term self sufficiency in nations security has been overlooked. Private sector participation in defence needs to be increased multi fold. There is huge talent in India which is just being exported to other nations.
Inflation and Interest rates: If food price inflation continues to rise in F/Y 2012-2013 then one can expect a fall in Indian GDP growth. Forget about the headline inflation numbers. The real picture is that of a worried and hapless people worried more about food prices and cost of living. The cost of living in Urban India as well as rural India has risen sharply over the past few years. The industry needs lower interest rates which the RBI cannot do to prevent inflation spiral.
Oil price shock: India is an oil importing nation and higher crude oil prices always does a big hole in government finances. Higher oil prices will increase the budget deficit. The government has to increase diesel prices and LPG prices and also reduce subsidy on kerosene in order to manage its finances better. I know that it will not be able to do the same and will also curb growth. But these are some of the tough measures which the government has to take. Oil prices are an external shock and which India and the world is facing.
Foreign portfolio flows (FPI): Indian stock markets are dependent on foreign investors for growth. Foreign direct investors come just once but FPI comes and goes and helps to meet the daily operating needs to the economy. The government in its budget had increased a number of sectors which can raise loans by way of external commercial borrowing (ECB) but ECB flows will depend on global liquidity situation. FPI are the key for India. Any substantial reduction in FPI can result in rupee weakening to 56.00 against the US dollar and the reverse will happen when FPI increase and rupee could gain to 45.50 against the US dollar. The government policies have been to encourage FPI in India and will continue even more aggressively in F/Y 2012-2013.
Geopolitical risk: India is not affected by what’s happening in with Iran or North Korea (apart from crude oil prices). However there have been skirmishes with Chinese military in the Indian ocean, Arunachal Pradesh among others. Any increase in military tensions with Chinese army will affect foreign flows. Although I do expect much to happen but will prefer to keep a close watch on the same over the next twelve months. Indians as well as foreign investors are used to Pakistan exporting terror to India which does not affect anyone. Even a one sided war with Pakistan (over the coming years) will not affect Indian growth. Watch China carefully. The UPA government has a step son attitude towards North eastern Indian states which China is taking advantage of. The government policies should be to restore peace and increase employment opportunities in the region. Further is lack of implementation of current employment generation policies in North Eastern India.
Fiscal Deficit: Fiscal deficit seen at 5.9 percent of GDP in 2011-12. Fiscal deficit seen at 5.1 percent of GDP in 2012-13. Current account deficit seen at 3.6 percent of GDP in 2011/12. This is very high and needs to be reduced. Any increase in deficit will shake the fundamentals of the economy. Gross market borrowing seen at 5.7 trillion rupees in 2012-13 which is very high.
Technical View on the US Dollar-Indian Rupee (USD/INR)
50% retracement at 49.10 is the key support and rupee can rise to 52.25 and 56.80 as long as it trades over 49.10
Only a daily close below 49.10 for four consecutive days will result in a fall to 48.39 and 45.54.
Rupee should not fall below 45.54
Intraday volatility will be very high.
Technical View on the Euro-Indian Rupee (EUR/INR)
50% retracement of 63.40 is the key long term support and euro can rise to 69.01-74.10 as long as it trades over 63.40
Only a daily close below 63.40 for four consecutive days will result in a long term bearish trend to 58.20 and 56.75
Expected trading range for F/Y 2012-2013: 63.40-72.00
ConclusionThere are endless pages which I can write on factors which will affect rupee prices. External shocks are uncontrollable. Internal shocks are in our hands. The common man needs more jobs, lower prices of food, cheap education, cheap healthcare and cheap rentals. These are needed so that he can have higher disposable income, higher spending and some savings. The industry needs cheap capital, sustainable long term consumer demand, low and efficient labour cost and a decent return on investment. These are there but a lot more needs to be done with every changing global environment. Jobs are there but pace of rise of salaries does not meet the increases in cost of living index. The Indian industry is innovative to keep itself float without any government support and government policies. But more has been to done in healthcare, education and self sufficiency in food stuffs. Only then one can expect double digit GDP growth which Indian can and has the potential to achieve. From the above it seems I am a socialist But I am trying to get into the real picture.
There is lot of speculation that rupee will weaken to 58.00 against the US dollar in F/Y 2012-2013. This may happen only if there is mid term central elections or nymex crude oil float over $125 for two months to three months continuously. Crude oil price is more a bigger risk to Indian economy than political instability.
Hedging strategy for exporters and importers
We prefer selling one year forward around if we get a net price of 53.00 (including forward premiums). Anything over 53.00 is a bonus for the exporters. Importers need to cover short term payables on dips as long as rupee trades over 49.80 and if rupee falls below 49.80 then do not cover.
Costing to be done by exporters and importers for F/Y 2012-2013
The price of the currency (usd/inr, euro/inr etc) is very important for exporters and importers and any sharp deviation from the same can result in net loss. Our experience is that most of the small exporters and importers take a very small margin (up or down) on the price prevailing on the date of export or import order is received. There are times when there is a big time lag between an export order received and actual payment received. Costing of the export order/import order and choice of currency (if one has a choice) is the key.
For US dollar – Indian rupee (usd/Inr): Exporter should cost at 48.45 for 2012-2013. Importers should cost payables at 49.10 for 2012-2013. The gap is due to the principle of conservatism.
For Euro – Indian rupee (usd/Inr): Exporter should cost at 64.40 for 2012-2013. Importers should cost payables at 66.70 for 2012-2013. The gap is due to the principle of conservatism.
It’s very easy to comment on the expected costing price. In actual it very is difficult to do so. We have a tried for a realistic picture of costing which can be followed by all.