"Burn down your
cities and leave our farms, and your cities will spring up again as if by
magic; but destroy our farms and the grass will grow in the streets of every
city in the country."
—William Jennings (American,
1860-1925)
Word
for the day
Anthophilous (adj)
Attracted by or living among flowers.
Malice
towards none
Why a sudden rush in media
to highlight the secular credential of the Yogi?
First random
thought this morning
The common market area of Europe (European Union) is looking distinctly
similar to the Congress Party of India.
The people outside it are not very sure if it will survive. The
people currently inside are divided. Some, primarily who have lost their niche
and suffer from a relatively stronger Euro, want to leave. Some, primarily who
have gained from market access and relatively weaker Euro, hope that it is a
sustainable arrangement, and therefore want it to stay.
Few appear confident about its relevance or otherwise in the
current context.
Where INR is headed
A lot of people have expressed
their surprise as well as concerns over sharp appreciation in INR value versus
its global peers, especially USD, in past few months. Many have sought my views
on the likely path for INR in near future.
I want to make it clear that I am no expert in the matters of
macroeconomics, foreign trade or currency trades. While I do assign a small
weight to the currency impact in my investment decisions; the consideration is
mostly limited to avoiding companies that are unduly impacted by currency
volatility.
I also strongly believe that Portfolio investment of few billion
dollars may not have any lasting impact on the exchange rate of INR. However,
sustained FDI inflows do support the case for some currency appreciation.
In my view, like any other tradable commodity, the exchange values
of a currency vis-à-vis other currencies depends on the relative demand and
supply of these currencies at any given point in time.
In simple terms, the recent sharp appreciation of INR vs. USD in
recent months indicates that the demand for INR vs. USD has sharply outpaced
the supply. There could be several reasons for this higher INR demand versus
USD. For simplicity, I classify these reasons in three categories (a)
structural, (b) cyclical and (c) speculative. Some examples are as follows:
Structural reasons
(a) There have been some
significant changes in the composition of foreign trade of India in past one
decade or so leading to structurally higher demand for USD.
The structure of our imports has changed in favor of consumer
goods as the domestic supply has failed to meet the burgeoning consumption
demand. A large part of this demand has in fact been generated through massive
government social sector spending and managed Chinese currency. The imports and
therefore demand for USD is mostly inelastic to economic growth.
On the other hand the composition of exports has changed in favor
of engineering goods, from dominantly consumer goods (tea, tobacco, leather,
spices, textile, jewelry etc.). This has increased the correlation of exports
to global growth, which is likely to remain below par in at least for next few
years.
(b) The change in political
regime in 2014 has restored the confidence of global community in Indian
political establishment and therefore markets & economy. This confidence
was seriously impacted by a spate of scams, scandals and policy flip flops in
the preceding 5-7yrs. This has certainly led to reduction in risk premium for
INR denominated assets. Besides this has also prompted higher inbound FDI.
There is nothing to suggest that this trend will reverse in near future.
(c) The efforts to improve
infrastructure and remove procedural constraints are likely to help improving
India’s export competitiveness and result in higher exports growth.
The structural reasons are therefore mostly in balance at this
point in time.
Cyclical reason
(d) The success of RBI's
measures in reigning the runaway inflation, strict fiscal discipline and
improvements in trade balance have helped lowering rates in the economy to a
limited extent.
As of now, both the inflation and fiscal deficit seems to have
bottomed out and accordingly RBI has changed its policy stance to Neutral
from the earlier Accommodative. The interest rates are therefore not
seen changing materially from the current level in very near term.
This stability has made INR assets attractive to foreign
investors.
(e) The protectionist
measure taken by the government in past one year to curb imports and promote
exports through various tariff and non-tariff measures have also helped the
trade balance to some extent. For example, from a large steel importer, India
may have turned into a net steel exporter in past one year.
(f) The outlook of EUR is
clouded by the political calendar of Europe, especially schedule for Brexit,
French and German elections. This is also seen helping Indian currency that is
being perceived as safe haven by many under the current circumstances.
Speculative reason
(g) The Fed Chairman’s
recent remark about the gradual trajectory of rate hikes, against the widely
speculated steep hikes, has led to recovery in US bond yields and weaker
outlook for USD. This has made emerging market local currency assets attractive
on relative basis.
(h) The move to abolish 86%
of Indian currency in circulation is speculated to have resulted in material
reduction in informal market for USD, known as hawala trade in common parlance.
This is speculated to have resulted in significantly lower demand for physical
dollars in Indian market, resulting in stronger INR.
On balance, I feel the current strength in INR is mostly cyclical
and to some extent speculative. It may not last beyond few months, in my view.
Presently, I am working with 67/USD as average exchange rate for my FY18
earnings.
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