Category Archives: Forex

RBI Cuts Benchmark Rates – Now What?

The much talked about interest rate cut finally happened today. RBI Governor keeping true to his character surprised the markets with an earlier than expected cut taking India on a path different from Russia and Brazil where central banks have increased the benchmark rates in the past few weeks.

I must say it’s a brilliant move by the Governor to put the ball back into Finance Ministers court and push for structural fiscal reforms in the upcoming budget. The general sentiment has been that the higher rates are keeping India from growing which overshadows the fundamental issues of red tape, poor infrastructure and wastage in public expenditure.

The sustained fall in oil prices (thank Russia for occupying Crimea) has given India the much-needed window to push through reforms without being worried about stroking uncontrolled inflation.

The question is that will this rate cut and structural reforms be enough to achieve the targeted growth? No, absolutely not. The other key factor, which should not be ignored, is the exchange rate of the rupee against other currencies. To recap the last year – Rupee has oscillated between 58 and 63.5 against the US dollar (I use USD as a benchmark because the other rates are nothing but a cross rate). The fall in rupee has been less pronounced as compared to its Asian peers like the Malaysian Ringgit, Indonesian Rupiah, Singapore Dollar, Korean Won etc. On the global front, the Yen, Euro and Pound have also dropped sharply against the USD resulting in net gains by the Rupee against these currencies as well.

While the gains in Rupee boost the feel good factor about the India story – is a sustained gain in Rupee the right thing for the Indian economy? My take is that RBI would not let Rupee gain beyond the 62 mark to keep the exports competitive. There was evidence of this when RBI was seen buying dollars in the last week when Rupee gained sharply. With a generally weaker Rupiah, Ringgit, Peso and Riel the Indian exports would face tough competition in areas like garments, IT services, food grains and other manufacturing. Also with Euro and Pound weakening the demand from European countries would decline if the goods are not priced competitively.

With crude oil staying below 50, I think RBI would target the Rupee around 65 against the USD (at-least that’s would I would do, if I were the RBI governor). That would be a roughly 5% decline from the current levels and will bring it at par with other countries with export competitiveness. A sharp gain in the currency would negate any benefit that the lower oil prices would have and I don’t think the RBI or the finance minister would want that.

We should not forget that infrastructure reforms do not happen overnight and take years to fully have the desired impact.

What would that do to SGD INR – 45 mark would remain as the strong support for the pair with upside of Rs.50, but of-course remitting money to India and investing in NRE deposits would always remain a good option.

SGD INR: 50 with SG@50?

Ever since the Prime Minister Modi came to power the feel good factor about Indian economy and India has increased dramatically. All Indians, including me, are rooting for improved Indian economy – infrastructure reforms, streamlining of tax code, improved law and order and not to forget getting back the black money stashed in overseas accounts. The expectation also is for the Rupee to strengthen as reforms kick in and help kick-start the much-anticipated economic growth.

The past few months have seen the pair oscillating between the 46-49 range and the volatility in the forex markets has been nothing short of a roller coaster ride. The pair dropped all the way to 46.5 after  the elections and bumped back up towards 49 only to test 46.5 again as the oil prices slid in the international markets (I was expecting a 45 floor as mentioned in replies to questions in the previous post).

SGD INR Dec 2014

INR has weakened against the USD to 63 as I had written earlier in (SGD INR: Post Election Euphoria) but interestingly SGD has also weakened in tandem. At one point in time the fall in SGD was greater as compared to INR and caused SGD INR to test 46.5.

Oil has fallen dramatically in the past few weeks and raised concerns of Central Banks not being able to meet their inflation targets prompting talk about monetary easing. A falling oil is good for India’s Forex reserves which has lent some support to the Rupee. On the other hand though the market sentiment remained weak as India’s trade deficit widened to one-and-a-half year high of $16.86 billion in November due to over six-fold jump in gold imports. Trade deficit in November last year was $9.57
billion.

The key events in play as I write are:

  1. Falling oil Prices and the rout of Rouble
  2. Bank of Japan’s push to achieve 2% inflation
  3. Expectation of FED rate hike in 2015

Falling oil prices can make the FED hold on to rate hike and also bring strength to SGD as the safe haven theory comes back into play. My expectation is for the Singapore Dollar to appreciate back to sub 1.30 level and Indian rupee to move upto 65 level which would bring the SGD INR back at the magical 50 mark in time for Singapore’s 50th birthday

 

SGD INR: Post the Election Euphoria

Time flies and it’s already June – I can’t believe that the last I wrote about INR was in February and whole world was speculating on the outcome of the Indian elections. I did not expect the BJP to win with a full majority given the polarisation of votes, combined with regional politics and was expecting a hung parliament. 

Based on that I had predicted that the Rupee would fall back to the 63 mark against the USD and 50 against the SGD (SGD INR: A storm in making). However, to my delight, the BJP did get a full majority. This meant that the uncertainty of a hung parliament and issues cropping up from coalition government were instantly non issues.

The markets reacted favorably to a government formed by progressive and reform oriented leaders and pushed the Indian Sensex to all time highs of over 25,000 and Rupee appreciated quite quickly to the Rs.58 mark against the USD. With many a Indians residing in foreign countries who remit money to India the obvious question was – Is the rupee headed to 55 against USD and should I transfer money to India now?

My answer to many such questions was – “the fundamentals of the economy don’t change overnight just with a stable government and the real effect of policy changes would take months to materialise and I still expect Rupee to stay over the 60 mark against the USD”

One of the first places to start when looking at fundamentals is Implied Exchange Rate calculation. Over the past years the spot rate has tended towards the Implied Rate Line (chart below: using SGD INR)

SGD INR 2014

and the calculation suggests that the SGD INR would move back towards the upward trending implied exchange rate line as the RBI is going to hold the interest rates steady – the inflation is still alarmingly high.

Other factors that would be playing against the Indian Rupee would be:

1. Crop losses due to el Nino weather changes

2. Increase in price of crude if the tensions in Iraq escalate

3. Global slow down in the background Ukraine crisis and escalation in South China sea

As I write the Indian rupee has already crossed the 60 mark against the USD and 48 against the SGD and I maintain that the INR would move towards the 63 and 50 mark against the USD and SGD in coming months.

SGD INR: A storm in making

It’s a new year and right about time to do a pulse check on INR for the coming year. The past few months I was very busy at work and with the currency being relatively stable I did not want to write something just for the sake of writing. As mentioned in the October post the currency stabilised in the last quarter of 2013 and stayed well within the 60-65 range against the US dollar and hovered around the 49 mark against the SGD (INR – Directionless in 4th Quarter)

One would have expected things to remain calm for a few more weeks in 2014 before the Indian Budget and upcoming elections in March and May respectively but the global markets had something else in mind.

The Federal Reserve started the much-anticipated tapering of Quantitative Easing (QE) in December, with reducing the Bond purchases by 10 Billion USD a month to 75 Billion and followed it by a reduction of another 10 Billion in January 2014 which spooked the emerging markets.

Turkish Lira and Hungarian Forint were aggressively sold off and the Argentinian Peso is unofficially devalued. The data from China is not exactly exciting and Indonesian Rupiah and Thai Baht have their own set of problems to deal with. At the same time the RBI came out and surprisingly increased the benchmark rates in January announcements which I thing was more of a pre-emptive move to shore up defences against any potential sell off in the Rupee. With such weakness in the other Emerging market currencies the Indian Rupee, I must say, held ground very well.

But this is just the start of the year and there are quite a few events lined up in the coming months that would determine which way the Rupee moves. On the global macro side the course of Global Financial Markets a.k.a. the pace of QE would drive the general sentiments towards emerging markets. On the domestic front The Indian Budget announcements and the general elections would be the key determinants.

Looking at the global front I do not expect the federal reserve to stop tapering and ultimately end the QE program unless there is definitive bad news on the US unemployment and inflation. This reduction in QE would be Rupee negative and as in May – Aug 2013 time frame has the potential to push the Rupee down.

On the domestic front anything short of a stable government with full majority would be a negative for the markets. I think that this stage there is no one clear party that I could say would achieve the majority.

So in the short-medium term of next 3-4 months the chips are stacked against the rupee and I do expect it to touch trade towards the 65-67 mark.

What that does to SGD INR? Well the SGD has slightly weakened against the USD and has been trading at 1.27-1.28 area. Deteriorating global fundamentals tend to result in strengthening SGD as a safe haven currency. So with the expected weakness in the Rupee and potential appreciation of the SGD, SGD INR could march back to the 53 mark in the coming months.

SGD INR – Current Trend and Long Term Implied Rates

SGD INR has been holding strong over the past few weeks and even though INR has appreciated roughly 10% against the USD the appreciation against SGD has been roughly 5%.

Historic lows were 69 and 53 against USD and SGD and the currency trades at 62.5 and 50 as I write. SGD has shown stregnth as with its safe haven appeal.

The Long term implied rate for SGD INR tracks at 47 mark. Looking at long term trends the spot exchange rates tend to track back towards the long term implied rates.

Image

In the short term I expect the pair to hover around the Rs, 50 mark with the direction being decided based on international events.

 

INR – Directionless in 4th Quarter

The US debt and budget talks finally reached a resolution yesterday, the congress passed the bill and the much feared US default was averted and the financial markets breathed a sigh of relief. Interestingly the Indian Rupee has been pretty flat both pre and post the US saga.

The drop to 69 against the USD on 28 August was the low point for the Rupee and it steadily regained lost ground in September (Rupee Doing a Bungee Jump – Time to bounce back?) and hovers around 61 as I write.

I often ask myself what has really changed in the past month but can’t find a fundamental reason for the pull back. My take is that it was a technical pull back with Rupee being oversold. Yes one could say that RBI got a new Governor in Raghuram Rajan and that helped Rupees cause, but if changing governors could help the Rupee strengthen by 15% then maybe RBI should abandon monetary policies and use governors to set the direction of the currency :).

Looking at the fundamentals nothing really has changed in the past 2 months – RBI did come up with a FCNR scheme, increase the duty on import of Gold and television sets and a benchmark rate increase. The FCNR scheme is reported to attract 10 billion USD in deposits which would add no more than 3% to the foreign currency reserves. The increase in duty on gold has got the premium over spot soaring in indian markets and made gold smuggling attractive and the increase in duty on television sets has made travel to Thailand and Singapore less attractive – believe it or not bringing in television sets from overseas trips was a great way of subsidizing foreign travel.

On the policy front nothing really has changed in India and no progress is expected until after the next elections in 2014. On the global front there is still a lot of uncertainty and the fear of Quantitative Easing (QE) taper is still there. The general consensus is for no taper before late march 2014 but its an event that will happen sooner or later.

With all the uncertainty and political wrangling I expect the Rupee to remain directionless to the year-end.

63 should act as the pivot against the USD with a variation of 5% either side – a range of 60-65 would be the order. However against the SGD things should be slightly different with 50 acting as a strong magnet.

Rupee Doing a Bungee Jump – Time to bounce back?

 

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.

Want to eat a Big Mac – Go to India!!

“Ridiculous, Insane, Irrelevant…why the hell does one need to go to India to have a Big Mac, I have a McDonald’s just around the corner!!”

That was the reaction I got when I suggested to one of my friends that having a Big Mac in India might be a good idea. What we were discussing was the recent battering of Indian Rupee and his view was that an Indian national working overseas has gained with the falling rupee.

My stand was that well in pure conversion terms, yes every Dollar, Dinar, Euro or Dirham fetches more rupees but the steady inflation rate of over 8% has made the cost of living in the country higher as well. India is no longer as cheap as it used to be and the cost of living in bigger cities can be more or less similar to any other developed country.

In case you have not guessed by now this friend of mine is not an Indian national.

However to prove his point that indeed things are not as expensive in India he pulled out the Big MC Index on his beloved tablet. Here is what I saw – INR is undervalued by over 50% against the USD.

The interactive index can be viewed at – http://www.economist.com/content/big-mac-index

His defence being that if a McDonald’s Burger costs only USD1.5 in India and is USD 4.56 in US then how can one say things in India are not cheap. This was a classic Purchasing Power Parity evaluation and I could see that no matter what I said there was little I could say to show him the bigger picture. So my instant suggestion was ” Want to eat a Big Mac – Go to India!!”

Well we had a good laugh after our banter but this also made me think that the well reported reasons in the media and business dailies just do not seem to hold well against the traditional – Interest Rate Parity and Purchasing Power Parity theories.

With a interest rate of 7-8% on the government securities and purchasing power parity mismatch, as shown by the mc index, the currency is grossly undervalued. Of course, the Current Account Deficit and the huge spend on Gold and Oil import is a big reason for dollar demands for India.

The deficit issue can be tackled by a two pronged approach – making the country self-reliant for energy needs, and increasing exports. The vast coastal lines, desert areas, and rivers are all perfect venues for investing in alternate sources of energy and exports could be boosted by reaping benefits of the weak rupee. Gold is a bigger beast to tackle as I cannot see how India’s love for gold can ever diminish 🙂

On a side note I would still travel to India to have a McDonald’s burger – not because it’s cheap, just so I can get the McAloo Tikki.

SGD INR: 44… 47… 50?

Now don’t tell me you haven’t wondered if SGD can fetch 50 Rupees per dollar 🙂 and I have to admit that with the current rupee weakness it does not look like a impossible number to achieve.

What’s transpired in past 2 months is nothing short of shocking…personally I never thought that the INR could go past the 60 mark against the US Dollar but then I did not expect the Indian Government to bring in the food security bill, in its current format either, which would cost 3.8% of GDP.

The GDP has already been shrinking and GDP growth is estimated to be well below the 6.5% mark as targeted earlier. With rampant red tape blocking foreign investment, tax evasion and upcoming elections the picture doesn’t look to change dramatically in the near future.

On 8th July the rupee breached the 61 mark against the USD and forced the RBI to step in with measures to stem the fall. Since then rupee has stayed below the 60 mark with a weak undertone.

On the other hand the Singapore economy posted a 3.7% growth for the second quarter of 2013. It was more than 15% growth on a quarter by quarter basis. The results looked good but the guidance does not suggest that the trend would continue.

In the meantime, to moderate the housing market, the Singapore government has come up with total Debt Servicing framework which promotes prudent borrowing practices. The SGD in the same time touched 1.28 and has sea-sawed between 1.25-1.28 mark.

So here is what I think is going to happen – The Singapore dollar would weaken towards the 1.30 mark against the USD. This would do well for the Singapore’s exports and the tourism industry. With the weakening of SGD there are rumours that the borrowing rates would slowly increase to keep the housing markets in check. I personally feel that the debt servicing framework is the first step to ensure residents don’t over leverage while buying a property and get in trouble when the interest rates move up.

So as always million dollar question remains what happens to the SGD INR 🙂

My take is that with INR at 60 and RBI showing resolve to not let is fall below and SGD hovering around the 1.26-1.27 mark the mean price for SGD would remain at 47. If the SGD weakens to 1.30 as expected and Rupee settles at 58 SGD INR should march back below  the 45 mark.

However if the RBI measures fail to have an impact the Rupee could weaken to 63 against the USD, mainly on account of rising oil prices which are the biggest drain on India’s foreign reserve. If that scenarios plays out then their is little to stop the SGD INR to touch the 50 mark.

However if I look at the Big MC Index the Rupee is undervalued by almost 60% using the purchasing power parity – more on that another day

SGD INR: Unexpected Rupee Weakness

The sudden weakness in the Rupee has caught most of us by surprise and has caused Rupee to cross the 45 mark once again agsinst the Singapore Dollar.

I was expecting the pair to face stiff resistance at 44 mark and not breach the 44 mark any time soon (Sgd Inr expected trend till end of June 2013). The rationale being that SGD and INR would both move in tandem against the USD which would make SGD INR a stable pair.

However SGD strengthened very quickly from the 1.27 mark against USD to 1.25 in a matter of few days on its safe haven appeal with the fear over slowing global growth and Fed reconsidering the pace of Quantitative Easing (QE). My expectation was for SGD to touch 1.28 before starting to strengthen again

Indian Rupee (INR) on the other hand weakened against the USD with rising Gold Imports and expanding deficit and is nearing 57 against the USD as I write.

Its worrthwhile to look at the long term Implied Interest Rates trend line for SGD INR with such sudden changes

SGD INR Jun 2013

Its quite evident from the trend line that everytime SGD INR has crossed the trend line it tends to reverse back to the mean. Every cross over is a good opportunity to convert to INR for investment or other purposes.

Market rumours suggest INR would touch the 58 mark against the US dollar which could see SGD INR crossing the 46 mark which for me would be a great level to convert.

My suggestion as always is convert in small amounts to average out your conversion rate as its not possible to catch the top and bottom of any market.