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There Is Limited Scope Of Rupee Appreciation

Monday, February 16, 2015
By Anindya Banerjee

Anindya Banerjee Currency Derivatives Researcher, Kotak Securities

It has been a few weeks of heightened volatility in the financial markets and currency markets. Global geopolitical and economic events are now aligned in a way that sustains the high volatility over the short to medium term. A ceasefire in Ukraine appears tenuous, as both the sides, Ukraine and Russia, remain distrustful of each other. The ongoing talks between Greece and other members of the Euro zone are far from reaching a conclusion, as the gulf between demands from both the sides remain pretty wide. On one hand, Greece is demanding a significant reduction of its outstanding debt and also room for fiscal stimulus to prop up the comatose economy but on the other hand, Germany fears that a debt reduction and fiscal allowance might set a wrong precedence for other members of the southern Euro zone nations.  Already, in the opinion polls, there are signs of emergence of leftist parties, in Spain, Italy, Portugal and other weaker Euro zone nations, along with France. At the same time, right wing parties are slowly making their presence felt in the stronger Euro zone nations like Germany. There is a risk that unless root causes of a dysfunctional Euro zone are addressed amicably, it can snowball into a situation where the political dialogue becomes hijacked by the right wing and left wing parties at the expense of centrists and moderates.

Turning our attention to the Indian economy, the newly revised GDP data has puzzled many. Generally, it has been seen that as the economy matures, the quality of the process through which macro and micro economic statistics are collected, improves. As more and more sections of the economy finds representation in the official statistics, the size of the economy tends to increase. However, in case of India, the recent revision has marginally reduced the size of the nominal economy. In the new GDP we find rejigging of sectors in a way that amplifies the share of the parts of the economy that have done well, at the expense of the more slowly growing sectors. As a result, GDP growth is now projected to rise to 7.4% in FY15, compared with 5.5-5.6% growth previously projected. However, the higher growth in GDP does not fit with the situation on the ground. Other macro statistics, like credit growth, consumption statistics, investment growth, business sentiment surveys and state of the rural economy do not paint a picture of India growing at near 8% rate.

Over the last fortnight, India also released the industrial growth number for Dec, as well as consumer inflation data for January and external merchandise trade figures for the last month. Industrial growth slowed to 1.7% in Dec from 3.9% in November, owing to low consumer durable goods and mining output. Manufacturing, which has a 75% weight in IIP, grew by just 2.1% in Dec. Mining shrank by 3.5%, the first contraction this fiscal, but part of this was due to the high base of last year. Electricity grew 4.8% in Dec. The Nov IIP has been revised upwards to 3.9% from 3.8%. For the April-Dec period of 2014-15, IIP grew 2.1% against 0.1% in same period of the last fiscal. India’s consumer inflation rose 5.11% in Jan, higher than 4.28% it clocked in Dec. This is a new CPI series with 212 as the base year. It is estimated that core consumer inflation was at 3.9% in Jan.

Merchandise exports and imports contracted by over 11% in the month of January. However, trade deficit too contracted to USD 8.32 bn from USD 9.45 over the same month last year. Between April-January of FY15, merchandise exports grew by 2.44% at USD 265.03 bn and imports grew by 2.17% at 383.41 bn, leaving a trade deficit of USD 118.37 bn during the period. When one dissects the data and sees the trend for non-oil exports, we have detailed figures up to December of last year, we find that non-oil exports have grown by a meagre 3.59%. In January, various media articles seem to be suggesting that there has been a broad based deceleration in exports, which means that once the detailed trade numbers are released for January, we can expect a further deceleration in the growth of non-oil exports. We have to realize, that Indian economy is going through a painful phase, where there is slowdown in every pocket in the economy. In such a situation, if India is unable to clock meaningful growth in non-oil exports, it can be detrimental for job creation within the economy.  

Weak economic performance and still prevailing stress in the financial system means, that there is limited scope of Rupee appreciation. At the same time, RBI has been intervening quite actively to support the US Dollar. We have seen FX reserves increase substantially, which can be partly thanks to valuation impact from non-USD currencies and Gold reserves but it does not undermine the fact that RBI has been an active buyer of US Dollar below 62.00 levels on spot. Technically too, USD/INR is well supported between 60.80 and 61.30 levels on spot and hence we would advise importers and FCY borrowers to utilize any dips towards the 61.50 levels to hedge their forward obligations. Exporters can wait for a push towards 63.30/64.00 region to hedge their forward receivables. Rupee is also expected to remain weak against the Yen and Pound but remain ranged against the Euro.

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