Why Nervousness of Rupee's Fate Will Continue for Many Months

Rupee's rollercoaster ride continues. Down yesterday, and today first up down, up... Well, I am sure people will get the drift. Of course, the fear that the rupee will plumb the depths it had some months back is still fresh in people's minds. I have been asked a couple of times in the last two months, especially in a popular radio show, whether I expect a major turnaround in the fortunes of the rupee. My reply has always been been that it is unlikely that it will appreciate beyond Rs 60 to a dollar in the best case and in most days till March-end it will probably hover closer to Rs 60 than Rs 65. I do still believe so. As we move ahead in the remaining part of the financial year, we can expect exports to perk up as US and some European economies recover. If the gold imports remain in control as they have (the unofficial imports i.e. smuggling must be going on), this should be a decent factor helping the rupee. Inflation is unlikely to spike internally (monsoon is behind us) though it can remain stubbornly high at the current levels.That leaves us with US Fed's so-called "Tapering". It is unlikely that anything drastic will be done by Fed real soon. History teaches us that economies recovering after recession triggered off by a financial crisis take long time to recover and do so slowly. The current global financial crisis is no different. It has been six years since 2008. Median wages today in the US are what existed about four decades back and public investment is at the same level as 1947. These are not the indicators of an economy out on a hundred metre dash in the next few months raising inflation and employment levels which the Fed will be eyeing before it begins the "Tapering". Of course, that will not stop people from getting nervous about the rupee since confidence in a currency is also about the confidence in the economy it represents. One has to admit that India's fundamentals need to be fixed. A critical milestone will be the fiscal deficit figure that will be mentioned in the next Union Budget on February 28. Once the world has known that the Government has been able to meet its target (by hook or crook) and also has been able to control the external deficit, which I think it will be able to meet, people will start feeling a little less nervous about the rupee. But that's more than three months away, isn't it? Well, till then, we can expect more of the same.    

Why the Rupee Could Become Weaker and Impact on Everyone's Finances

Now that the third quarter current account deficit figures of 4.3 per cent of GDP is out a few things are clear to me. We will see a situation in the future where the gap between growth of imports and exports will continue to be yawning. You don't need to be an expert to know that the top items in our imports list are things that we can't do without. I am talking about petroleum and edible oils. With rising international oil prices being the single most important threat to the global economy, especially India, the import bill could go into orbit any moment whether it is tensions in areas such as Iran or another round of currency pumping by some central banks. In the past, the huge amount of cash pumped by central banks found its way to commodities such as crude oil, pushing up their prices. On the exports side, things don't look too great with global economy showing weakness. In the US, joblessness is on the decline but the rate of fall is not brisk enough. We know how things are in Europe and China is now talking about far lower rate of growth. The one thing that government could try and do was checking gold imports which it tried to do in the Budget. But then, jewellers had other ideas with their strike.
Given this situation, one can expect people to seek more dollars and than the rupee or the rupee's value to weaken. This in turn will only mean more inflationary pressures and more stubborn inflation. Less likely will be a cut in interest rates and greater impact on the bottomlines of companies impacting their stock prices. Of course, this will also impact the investments in equity mutual funds and growth funds of unit linked insurance plans (Ulips) this year. Clearly, it looks as if the new financial year of 2012-13 will be fairly challenging.

Things Get Scarier in Europe

The happenings in the Italian bond market, the third largest in the world, are getting scarier. Unless the political scene there gets fixed with a PM who inspires confidence in the markets and European Central Bank comes up with a big enough emergency fund, the world economy and global markets would be on the edge. After Italy, it will be the turn of France. For India, the biggest challenge will be the rapidly declining rupee as dollars move out of India. It is already at a 3-year low I believe. This means more inflation among other miseries. Like my previous visits to the All India Radio studios, yesterday I was asked about eurozone in their popular stockmarkets programme. 

Now Italy, Next France?

Well, the whole eurozone mess is broadly playing out according to the sequence people like me had expected. After Greece, attention had to go to Italy, the larger and vulnerable European country, though the mess in Greece is far from over. For a country with so many coalation governments since World War II, I am constantly amazed to see how much Italy has acutally achieved economically. But now with the kind of prime minister it has and the kind of political squabbling that is expected, it is keeping global markets on the edge. If things get worse, it's France's turn. While most European countries have flouted the fiscal norms for eurozone, including Germany, perhaps countries like Italy and Greece just went over the top. If things get bad in Europe, we are talking about more forex flowing out of India, rupee depreciating, imports getting costlier and inflation fire getting some more pumping. Then how can we expect RBI not to raise interest rates in December, 2011? Well, looks like its a better idea to talk about the weather. Darn! The weather in Delhi is also not good. There you go.