Tag Archives: INRUSD

Indian Rupee is Overvalued and Chief Economic advisor agrees!!

Rupee is Overvalued and should depreciate – something I have been saying for 3-4 months now but for lack of time had not been able to do some research and share with everyone my thoughts behind the my assertion.

Reading the newspaper today I read Chief economic advisor Arvind Subramanian’s view as told to Economic Times,

“I think we have to be opportunistic, when there is a chance to allow it to drift down maybe a little bit it drift down but when lot of capital is coming in intervene to keep it stable,” Subramanian had said. “I agree that there is a part of the community out there that wants a strong exchange rate, but that would be very detrimental to our exports”


The rupee has been stable against the dollar but has appreciated against a basket of currencies, severely effecting the exports competitiveness. India’s exports declined for third month running in February. Rupee has appreciated 22.4% against the euro in the current financial year. On a trade-weighted basis, and after adjusting for inflation, in February rupee was the rupee was over 24% overvalued against a basket of currencies of India’s six largest trade partners.

The below table shows the performance of Indian currency against major currencies and the Rupee has strengthened against every currency other than USD and Chinese Yuan, the direct impact of this strengthening is that exports to these countries be it Software, Services or Goods all become less competitive

INR comparitive chart 2015Now lets look at the competition – Countries that export goods and services to the nations above –  big ones being Indonesia, Malaysia, Brazil, Russia, South Africa and the currency of all these countries have depreciated against Indian Rupee giving an advantage to competition.

INR Comparitive Chart 2015 2I think it’s a perfect time for India to weaken the Rupee while Oil remains low to boost competitiveness of exports and fill up our foreign exchange reserves. At the same time build oil reserves so that even when oil prices move up we don’t have to strengthen the currency in tandem to prevent the outflow of petro dollars.


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: 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: Expected to maintain 38~40 range post Budget

The Indian rupee has moved within the expected range of 38.0 ~ 39.5 for the past few weeks as the Greek bailout unfolded and the Indian government presented the 2012 budget. As we near towards the end of first quarter its time to take stock of the old and new variables at play.

The Euro situation

It would be naive to say that the eurozone crisis is completely resolved. This is a temporary respite as policy makers try and reign in situations in Spain, Portugal and Italy which could spell bigger trouble. The general analyst consensus is for a weakening Euro. Any weakness in euro would be Rupee negative as it would impact exports

Interest rates in India

RBI paused the regime of interest rate hikes in its latest monetary policy statement. The tug here is between inflation and growth, the expectation is for RBI to start lowering rates in the second half of the year. Oil Prices as always would be a key here as a large part of foreign exchange outflows are used towards the oil bill. I am expecting rupee to move in the 48.5~51.5 range against USD for next few weeks.

One factor which could result in rupee weakness as a result of FII outflows is the new tax law that allows the Income tax department to charge corporations for past dealings.

Singapore Growth

The Singapore exports grew at a impressive 30% and another survey results highlighted Singapore economy to be most resilient of all Asian economies. This would attract investment flows into Singapore but the expectation is for SGD to stay around the 1.26 level against the USD.

Putting all these aspects together I am expecting INR to stay within the 38 ~ 40 range (widening it by 50p due to positives for SGD and INR negatives). The overall bias should still remain INR positive.

So my strategy would be convert at any rate above Rs.39.75 if you are looking to invest in India

If Singapore heads to a Technical Recession what happens to SGD INR??

Market has been rife about Singapore heading into a technical recession in 3rd Quarter of 2011. Prime Minister has revised the overall growth outlook downwards in the National Day speech and there has been a steady decline in the Electronics Export and other trading activities.

A technical recession occurs when a economy experiences negative growth for 2 consecutive quarters. To spur the economic growth I would expect the fiscal authority to ease out the rise in Singapore dollar to make exports more competetive. Lets look at what happened in  the last technical recession of 2008.

The Singapore dollar depreciated 14% against the USD and moved from 1.35 to 1.54 in a span of 6 months!!

Now what does this mean for SGD-INR that is had a spectacular run of 9% annualised appreaciation in past 4 years?

Simply speaking the SGD INR is a cross pair between SGD-USD and USD-INR therefore a weakening of SGD against USD would result in a decline in SGD – INR. The current USD-INR rate is 46.25 and SGD-USD is at 1.203. To get a better view lets see what happened to USD INR in the same period where SGD fell against the USD

USD – INR moved to 51.5  from 42 in the same time frame which is a gain of 20%.

Scenario 1

Using the two gain numbers of 14% and 20% the USD-SGD pair should move to 1.37 from 1.20 as of today and USD-INR would touch 55.5. The cross rate usinf these calculations would come out to 40.51 for SGD – INR.

I am sure all who have SGD holdings would get all excited seeing the figure, but before getting too excited lets look at other possibilities.

Scenario 2

The INR going beyond 50 mark will spell trouble for the Indian economy specially if the Oil prices remain around the $80 mark and the Reserve bank of India would intervene to stem  the rise. So a possible future rate where the SGD weakens 14% the cross rate would come out to 36.50.

Scenario 3

Another possibility is that the SGD depreciates around 7-8% and moves to the 1.30 mark then SGD INR would be at the 38.46, assuming that INR moves to 50 against the USD which is also the current rate.

Now lets throw in the Interest Rate of 10% for Term Deposits in India – for a 6 month period from the current rate of 38.4 any money invested in India would yield 40.32 in target rate (tax free) which is close to the rates in scenario 1. On a post tax basis the amount would grow to yield 39.74.

So we have the facts lined up and no matter what the scenario is, repatriating money to India makes a lot of sense.

USD INR Carry – have you thought about it?

Forex trading and carry trade go hand in hand. A few years back it was USD against JPY, then the turn came for AUD against USD and recently people have been talking about EUR against USD on the prospects of US interests remaining low and Euro zone increasing rates to reign in inflation.

The key in all scenarios being large interest rate differentials that allow cheap borrowing in one currency and invetsing in the other. The usual trend is that the currency with the higher interest yield slowly gains against the lower interest rate currency.

AUD-USD moved from lows of 0.80 to 1.05 range gaining whopping 25%, the theme was similar for USD-JPY or EUR-USD.

The Reserve Bank of India has gradually raised interest rates to 7.5% from lows of 3.5% over past 2 years and US still is at lows of below 0.5%. USD INR on the other hand has fluctuated between 44 – 47 in the same time with the

Now given that the interest rate differential is 7% and how other currencies have gained with the carry trade there is no reason why something similar would not happen with USD – INR. Indian Rupee should be strengthening against USD in line with how other currencies have performed.

Yes INR is a currency of a developing country and uses USD to pay for the Oil that it imports but that still does not completely negate the interest rate differential.

Using a simple calculation 1USD invested in India @ Rs.45 would grow to Rs48.37 in one year and seeing the trend of USD-INR fluctuating in a close 3% range there is every reason to enter the USD-INR carry trade.

What does this mean in layman terms?

1. It makes sense to borrow in US and invest in India

2. If you are earning in USD and do not have any need to hold US dollars its beneficial to remit to India and invest

3. If you want to trade then a USD INR carry looks like a low risk trade