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.    

India is Not Alone: Global Slowdown Woes

Back in Delhi after an outstation trip, I must say the first two days of the week brought little surprise or cheer to me in terms of developments in the economy or the markets. Of course, it is easier on everybody’s nerves not to see the rupee fall the way it did last week. While driving back from work yesterday, I heard something interesting on a radio show reviewing the stockmarkets for the day. It said that the rating agency Moody’s doesn’t see its India rating change due to the fall in rupee (this is an old news though). The reason:  Since India’s political leadershop doesn’t look well-placed to bring about the much-needed adjustments in the fiscal space it thinks that the rupee’s correction accurately reflects the country’s realities. Coincidentally, this is a line I and my co-authors took last week when we wrote the latest cover story of Outlook Money magazine (www.outlookmoney.com). The issue hits the stand today. Hopefully, our readers will like the cover story and will find it useful.  The other disconcerting news coming in is the slowdown in China. Over the weekend, I read an interesting New York Times article on the slowdown there. The link is given here. http://www.nytimes.com/2012/05/25/business/global/chinas-once-hot-economy-is-turning-cold.html?pagewanted=all. Then, there is a video link from the Financial Times http://video.ft.com/v/1660792089001/China-faces-difficult-choices. The China real estate and construction scene always looked dicey to me. But now things should be worrying. The other interesting update I have managed to get is about the Brazilian economy. Apparently, in that country as well the authorities have tried to cool things down and they are now looking at a growth rate of about 4 per cent. Like India, it needs further reforms. A recent Economist articles argues on the same line. Here is a Wall Street Journal article link on demand for Brazilian debt http://online.wsj.com/article/SB10001424052702303395604577434412657454798.html?mod=rss_markets_main. Before I sign off, I need to say I thoroughly enjoyed reading the recent Economist survey on retail banking http://www.economist.com/node/21554742.