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.
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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.
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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.
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The FDI flows might slow down further as new
investment opportunities emerge in Americas.
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On the other hand the reverse FDI (Indian
corporates investing in overseas ventures) may accelerate.
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The global carbon market may collapse.
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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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