INR should look to rally from Rs 51 levels
The negatives of current account deficit, weak capital flows, slowing growth and inflation are not going to go away in a hurry. The INR when it was at levels of Rs 44 to the USD was seen to be strengthening further despite inherent flaws in the country’s economy, an INR at levels of Rs 51 to the USD is seen to be weakening further despite positives in the economy. The INR tanked from Rs 44 as the market realised the negatives in the economy, and in the same way it will rally from levels of around Rs 51 as the market realises the positives.
The Indian Rupee (INR) is seeing huge negative sentiments with talks of further downside to the currency. The INR has depreciated by 15.7% against the USD since 1st of August 2011 till date, the worst performer in relation to its counterparts. The Brazilian Real ( BRL) and the Russian Rouble (RUB) follow the INR in poor performance with losses of 13.9% and 11.2% in the same period. Surprisingly the Euro, which is seen as the cause of the problems leading to risk aversion, has fallen by only 5.5% against the USD in the same period.
The performance of the INR since 21st September 2011 till date is even more striking. The INR has fallen by 4.6% over the period while the other emerging currencies including the BRL, RUB and Korean Won (KRW) have actually gained against the USD. The stark underperformance of the INR since the third week of September against its peers is giving rise to questions of India’s fundamentals. Markets are now talking about further weakness to the INR due to worries on the current account, weak capital flows, falling growth and untamed inflation.
The question is are all the negatives built in to the price of the INR at Rs 51 to the USD or is there more pain for the INR. The answer is that all the negatives are built in to the prices and the INR should look to trend up from here as markets weed out the negatives and look for positives that are still out there.
India’s trade deficit at USD 19.6 billion for October 2011 was the highest on record. The trade deficit for April-October 2011 was USD 93.7 billion against a deficit of USD 102 billion seen in the same period last year. If trade deficit continues to trend higher, the current account deficit could cross 3% of GDP in 2011-12 from levels of 2.6% of GDP seen in 2010-11. However a weak INR helps exports of goods and services and exports could actually trend up in the coming months helping the current account.
On the capital flow side, FII’s have actually been net buyers of equity and debt for the months of October and November till date, with net purchase of USD 700 million of equity and USD 350 million of debt. The recent increase in FII debt limit of USD 5 billion each in Indian government and corporate bonds could see further debt inflows. Government and corporate bond limits of USD 10 billion and USD 15 billion have been almost exhausted with utilisation rates of over 90% and there is demand from FII’s who have not invested due to limit issues.
India’s growth rate is expected to come off below RBI’s estimates of 7.6% due to issues of global growth as well as issues of interest rates and inflation on the domestic front. However even at less than 7.6% GDP growth for 2011-12, India will be one of the fastest growing countries in the world. India’s inflation at 9.7% levels for October 2011, the sixth straight month of over 9% inflation, is making the RBI maintain its tight monetary policy stance. The RBI, which has raised benchmark rates by 375bps over the last twenty months, has indicated that rates are close to peaking out. If global economy continues to falter on Eurozone debt issues, inflation is likely to come off down the line, allowing RBI to ease up on policy.