The Rupee has breached all predicted floors in the past few days and has fallen like a rock.
It touched an all time low against the US dollar yesterday and traded at 68.78 loosing over 4% in a single day. The fall has been particularly sharp in this week as the rupee lost over 8% in just 3 days. Culprit in this case was the passage of Food Security Bill.
The Rupee was trading at 63.50 in 23 Aug (Friday) and with passing of Food Security Bill on Monday (26th Aug) sharply trended towards the 66 mark.
Food Security Bill (FSB) with all its right intentions of providing for the poor is not something the country can afford. The current account deficit has ballooned to over 4% of GDP and the FSB is estimated to cost 3.5% of GDP.
The looming elections in the coming year has got the ruling government to go after populist measures than trying to take some hard steps and get the economy back on track.
As I write this piece the Reserve Bank of India has come out and declared that it would be selling USD to Oil Corporations directly and this should provide some relief to the falling rupee. I would not be surprised that if the Rupee opens sharply higher and recovers all the losses of yesterday. But this relief rally would be short-lived as the fundamentals behind the fall have not changed. RBI’s step can reduce the volatility and demand in the Forex market but does not change the fact that the country does not have the money its spending.
On the flip side the fall of the Rupee might be a blessing in disguise for the economy. Exports from India become competitive and would bring in much-needed business to India. Where other countries like Japan have been deliberately trying to weaken their currency to improve exports India has this golden opportunity presented to it. Now does the government use it to the countries advantage or squander it away needs to be seen.
As an immediate measure my suggestion would be to launch a scheme to provide amnesty on bringing black money stashed abroad to India and investing them in Rupee denominated Bonds. The size of the black money in India is estimated to be 30% of the GDP as per World bank estimates. Of this 30% at least half is stashed overseas (some figures report higher numbers).
The Finance ministry could launch a scheme with 2 alternatives:
1. Bring in the black money tax-free for investing in non-interest bearing Rupee bonds. The money would be locked in for 3 years.
2. Bring in the black money by paying a 14% tax and investing in 5% interesting bearing Rupee denominated bonds.
With India’s Current Account deficit pegged at 4.9% of GDP and Black money overseas of at least 15% of GDP, this scheme could single-handedly support the falling Indian Rupee and bolster the Indian Government’s coffers. The instant demand for Rupee would push the currency up and bring in long-term capital to the country. Government could go a step ahead and allow the Bond Holders to borrow interest free against the Bonds if Investing Food or Energy Sector.
For the longer term, investments need to be made towards achieving food self-sufficiency and improving energy sector. The money collected through the amnesty scheme could be used to build storage facilities and investing in alternative sources of energy.
Aditya Ladia 
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Been stable around 48-49 for over a month now, it seems unlikely the pair’s gonna cross 50..what do u think?
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I think it will cross 50 in next 10 days….the fundamentals of rupee are still weak.
The trading band should remain 48.5-51
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Mate, I’m a newbie to the financial world. Quick question, if you were given 2 options as below, which one would u choose:
1) Create a USD FCNR for 3 years (4.95% int), catch – premature closure is out (with recent RBI swap window)
2) Create a INR FD (9% int), can withdraw in a year’s time.
Depends on the USD INR outlook by 2015 I believe..If it’s expected to go somewhere like 75, it probably makes sense to keep your money in a ccy that would expectedly get stronger. However, if it’s supposed to go low or even remain around 65 (as today), I’d still prefer to keep it in INR FD (mainly because of the interest rate of 9%)
Thoughts?
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Hi,
Let’s put numbers around the 2 scenarios. 100 USD in FCNR would grow to $114.11 in 3 years time.
The same money converted to Rupees at 63/usd would grow to 8158 in 3 years at 9% interest. This would mean that if after 3 years the exchange rate is 71.50 then both investments would have yielded equal returns.
If the expectation for exchange rate is Rupee favorable then strategy 2 is preferable else strategy 1.
Its very difficult to say what would happen in next 2 years. I don’t think anyone of us could have thought the rupee to weaken to 69 a dollar.
My take is that with elections getting over in the next year govt would take steps that are rupee positive. However the US fed tapering is a USD favorable event. On a parity basis 70-75 is a fair price for rupee and that helps with exports.
I would go with strategy 2 as it gives greater flexibility on re investing money with a shorter lock in.
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Great thanks Aditya. With that said, what’s your take on the SGD-INR rate in the next couple of weeks? With the current rate of 50, any notable events that might affect this? Particularly is an increase foreseen? If yes, I might as well wait until then in order to convert the bulk into INR
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The next fed meeting in late Oct would be something to watch out for. I would recommend converting in small chunks whenever you get 50 or more. Its very difficult to catch the top and bottom of the markets.
Cheers
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Do you think rupee will bounce back anytime soon? If yes, will it go to 50s or will stay at 60s? Thanks
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The bounce back is already on way the rupee closed at 63.3 today almost a 8% retracement from lows. I think it will hover around 62-64 in the near term. Though there is a possibility of one more sell off with Syria crisis coming up
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Hi Aditya,
Many thanks for your analysis about SGDINR pair. I had converted SGD and invested in INR and getting the 9% return. With this high volatility of SGDINR I want to hedge my investment. I would appreciate your thoughts on this
I can’t sell INR in the SPOT market for this purpose. What I need is futures or forward contract on this pair. Do you know of any bank or brokerage firm who could provide such services?
Thanks for your help
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Hi Sundar,
I am not aware of any broker or bank that offers a SGD INR forwards contract. I personally use oanda.com which provides the USD INR pair NDF (non deliverable forward). The spreads are around 15-20 pips and 25% margin requirements.
Given that the current volatility in SGDINR is mostly on account of INR against USD hedging using the USDINR pair would be a good idea.
If you want a complete hedge you could use two contracts USDSGD and USDINR to create a synthetic SGDINR position.
Hope this helps.
Cheers
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Ironically, when whole nation (every Indian) is saying that this sharp fall is because of FSB, government’s representatives are saying “NO”, this is because of Global cues and no domestic problem is the cause. Now, under such condition when elections are just few months away, I can bet that there will be nothing this government be doing apart from playing some more “POPULARISM” stunts in the parliament. Expecting from the govt. to bring back the black money is pinnacle of optimism and can only be true if the inner-self of all the politicians rise at the same time (which we all know is not happening in this birth of ours).
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Difficult times call for innovative measures and if the govt shows the will to bring in the black money they will win the elections hands down
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