Friday, March 8, 2013

Who moved my cheese?


Who moved my cheese?

In past couple of months, our readers have raised more queries regarding currency than equities. The worries on current account are now universal, well articulated and well documented. The economic survey, RBI policy statement, budget speech, rating agencies’ reviews and professional economic and banking research analysts all have expressed concerns over the worsening current account and its implication for the Indian currency.

We have been regularly highlighting the structural issues that make the current account unsustainable. In our view, besides economic and market forces, the confidence of people in their own currency also impacts its value.

Empirically post 1998 we had witnessed strong Indian sentiments towards the rupee. The sentiment did reflect in substantial rise in NRI remittances, NRIs buying rupee assets, and significant rise in investment in real estate – despite all regulatory hurdles and administrative problems.

This trend has definitely weakened, if not reversed. The preference for USD and gold is seen higher as compared to INR amongst most professionals. The unskilled and semi-skilled labor is currency neutral as they continue to remit money to uplift living standard of their family back home. Besides they do not get much investment opportunities in the country of their work.

Many NRI living in US and EU are finding the local real estate more attractive than Indian properties.
Secondly, the energy revolution that is gradually developing in USA and Canada is attracting a lot of attention even from Indian entrepreneurs. The lure of cheap and sustainable source of energy may likely set the clock in reverse order – driving the manufacturing back to Americas. This could have serious implications for India’s trade balance.

-          The technology and process knowledge transfer that had accelerated in past one decade may take a big hit as the manufacturing stays back or relocate to Americas.

-          India’s endeavor to transform itself from supplier of raw material and low cost converter may face serious hurdles. Thus, the reliance on imports may rise, whereas the value addition in exports declines.

-          The FDI flows might slow down further as new investment opportunities emerge in Americas.

-          On the other hand the reverse FDI (Indian corporates investing in overseas ventures) may accelerate.
-          The global carbon market may collapse.

-          The industrial job growth and wages stagnates.

In our view, though it is very early to draw any conclusion from these assumptions, these cannot be dismissed as purely speculative. The investment strategy therefore needs to factor this in as a note of caution of at least.

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