A Weaker Rupee

There are concerns, but not as bad as 2013…

As the rupee weakened to a 20-month low of Rs.64.23 / $, the specter of 2013 was raised once again. In that brief period between June 2013 and September 2013, the rupee plummeted from Rs.52 to Rs.70 per dollar. While the rupee has shown a weakening trend of late, it may not be as bad as 2013. Let me explain, why!

The deficits are under control…

The government has largely succeeded in meeting its fiscal deficit targets. Even the revenue deficit is nowhere close to what it was in 2013. To top it, the forex reserves at $350 billion, is more comfortable, especially considering the fact that oil is still 40% below its peak price. Of course, the trade deficit is as large as India’s oil import bill and gold imports have been on the rise. Unless crude oil prices start moving up sharply, there may not be a really negative impact on the rupee.

FPI flows may not reverse…

In many ways this is a Catch-22 situation. When FPIs expect the rupee to depreciate, they tend to rush for the exit, which exacerbates the situation. The biggest advantage for India is that GDP growth is at a healthy 8%, as against a sub-5% growth that India reported in 2013. With the Indian GDP growth story to sustain for the next 6-8 years, the FPIs will not have a real incentive to pull out of Indian equities en masse. One must also remember that with the rising AUMs of equity mutual funds, growing equity sinews of LIC and the EPFO’s entry into equities, the domestic institutions may emerge as a potent force. They can substantially, if not entirely, compensate for the outflows of FPIs.

If “Make in India” reallbet y works…

That would be the big of this government. If the Make in India campaign succeeds, it could substitute imports and position India as a base for global manufacture and exports. If it works, it could be a real game-changer.

But, there are a few concerns…

There are 3 key concerns on this subject. Firstly, the RBI has shown that it will be keener to prevent a stronger rupee than a weaker rupee. That is logical due to the spillover benefits for exporters. Secondly, the trade position is still negative and the situation is worsening, in spite of weak oil. India has been funding its fiscal deficit for too long with portfolio inflows. That is an unsustainable situation in the long term.

But the biggest worry of all is the huge dollar exposures that Indian corporates have. Many of these positions are also un-hedged. A sharp fall in the rupee can have a domino effect combining portfolio outflows and a rush to hedge. That could be surely troublesome! ©

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