Friday Podcast 27th September 2013
Transcript of Podcast
The Indian Rupee (INR) is still on life support. The only reason that it strengthened by 9.5% from lows of Rs 68.80 to the USD to levels of Rs 62.20 is due to profit taking by short sellers at lower levels, US Federal Reserve postponing bond purchase withdrawal and the RBI taking measures to increase USD flows. The INR can easily go back to its lows if there is a sudden shock in global markets, either by the Fed withdrawing its asset purchase program faster than expected or by geopolitical tensions in the Middle East leading to spike in oil prices globally.
The INR has a very strong reason to move down again now and this is purely domestic. Foreign investors and NRI’s have a reason to believe that India will show progress on reforms aimed at lowering the twin deficits, the fiscal and current account deficit. The belief stems from the fact that the government has gone on record on structural reforms in global investor forums. The Indian government is desperate to get in FII and FDI flows into the country to keep the INR from falling off the cliff.
The two recent announcements made by the government is definitely a cause for concern for the INR. One is the announcement of no diesel price hike and that fuel prices could be brought down and the second is the formation of the 7th Pay commission.
The INR is down over 50% against the USD over the last six years primarily due to 6th Pay Commission recommendation implementation and due to lack of pass through of rising global crude oil prices to the end user. India’s fiscal deficit touched 14 year highs of 6.46% of GDP in 2009-10 on implementation of the 6th pay commission. Fuel, food and fertilizer subsidies took up fiscal deficit to levels of 5.75% of GDP in 2011-12 from levels of 4.79% of GDP seen in 2010-11. Fuel subsidies have also impacted the current account deficit that touched all time highs of 4.8% of GDP in 2012-13, as fuel consumption was not rationalized.
The government has added fresh worries to both domestic and foreign investors alike on the 7th pay commission formation and lack of pass through of global oil prices to the end user. Markets could start factoring in higher deficits going forward and that would mean fresh pressure on the INR.
The INR falling on the back of the government going back on its commitment to reforms cannot be saved. RBI cannot save the INR nor can the US Federal Reserve save the INR. The government may find itself fighting the INR fall going into the 2014 assembly elections.
The government should realise that the INR is the barometer of its performance and if the currency is at record lows going into polls, even the most loyal voters will vote for change. Hence, the government must stop its poll gimmicks and get on with taking the right economic decisions.
Have you registered for the The Weekend Online Fixed Income and Currency Markets Training Program? Please call toll free 1800-102-1611 or log in to INRBONDS.com for registration.
Thank you for listening in. Have a good weekend.