Tag Archives: Rupee against SGD

SGD INR in 2018, the inflation conundrum 

It’s been really long since I wrote a post dedicated to SGD INR and as 2018 fast approaches time is ripe to share my views on how SGD INR could move in the following months.

Given the politically volatile times that we live in and dilemma the central banks in developed economies face with prolonged period of low inflation,  a few interesting scenarios might play out.

Starting with India, with the implementation of demonetization and GST the countries GDP has taken a hit, which was not entirely unexpected. Any country that has implemented GST, experienced turbulent time of approximately 18 months before the benefits started to roll in. Alongside the GST implementation, the government has also been aggressively pushing for interest rate cuts to increase the economic activity. However, with the recent inflation print which came above expectations and crude  oil prices persisting above 50 USD a barrel,  the chance of rate cut in December ’17 is next to zero. The risk of inflation further accelerating is high and RBI has rightly held off reducing rates further until there are signs of moderating / low inflation. Now, a lot of this can be resolved if the manufacturers/producers start passing the benefits of reduced taxes from implementation of gst to consumers, this would result in reduced prices, which will lead to lower inflation and set the stage for a RBI rate cut but structural reforms of this scale take time to fine tune. 

On the political front, the elections in prime ministers home State of Gujarat are scheduled in less than a months time followed by a few more states with the National elections soon in sight in 2019. Any upset in the elections or signs of losses to the ruling party will result in re-evaluation of investor sentiment in India.

Now looking at the global factors, the 2 major central banks have diverged their monetary policies with Federal Reserve firmly on a path of rate hikes and ECB continuing with its Bond Purchases and negative interest policy well into September 2018. Japan has also indicated to continue with ultra loose monetary policy until inflation hits 2%. How did central banks arrive at this 2% magic figure is still beyond my understanding but that is a topic for another post. 

With the US Federal Reserve increasing rates,  reducing interest rates will be extremely challenging for RBI and without lowering rates encouraging new investments in India that leads to Job creation a distant dream. A divergence of relative yields between US treasuries and Indian bonds can result in a sudden flight of capital from the country.

At the same time the valuations in the Indian stock markets are at all time highs and the market trades at PE of over 23 which again by historical standards is high and suggests a correction. Infact the global stock markets are trading at an all time high with this liquidity driven rally. With Federal Reserve increasing rates, the investors will be forced to consider cost of  capital which could result in market correction and money being taken out of India. 

The silver lining amongst all this is that Indias foreign reserves have crossed 400 Billion dollars and that would provide some cushion against external shocks. 

In Singapore, the inflation and GDP growth has picked up but is still erratic. Singapore Dollar being a managed currency against a basket of currencies, of which USD, Euro and Japanese are a part of, the policy divergence between US and Europe will be interesting to watch. MAS administers the monetary policy through exchange rate and is maintaining a neutral slope of exchange rate band but with US Treasuries strengthening yield curve how long would this band remain flat is a question worth asking. 

Another very important factor not much talked about is the political succession in Singapore. Prime Minister Lee Hsien Loong has expressed his desire to step down as the prime minister or atleast have a succession plan in place. Who will succeed him and the political fall out from that move can impact Singapore economy and SGD. 

Singapore is fast trying to re-invent itself and write the next chapter of the growth story by catching on to the fintech wave and bio medical Research. Can these initiatives bring in new investments and create jobs will have to be seen.

So both currencies have their set of political risks and also will be impacted by increasing US interest rates. 

Singapore being a smaller economy and having shown greater nimbleness to react to global events is slightly better placed when compared to India making SGD slightly stronger than Rupee on a relative basis. 

I believe that just like 2017, 47.50 will play a pivot for the currency pair and we could see a range of 46 to 50 in the coming months as the inflation conundrum plays out – India wanting a lower inflation so that they can cut interest rates and developed world wanting higher so the rate increase cycle can continue. 

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SGD INR crosses 50!!

Finally the SGD INR RATE crossed 50, it’s taken 3 years for the pair to return back to this level and there is more appreciation to come.

In Aug of 2013 the Rupee was battered to all time lows and the RBI had a new Governor in Raghuram Rajan in September. The fiscal situation looked bad then with oil at all time highs and political uncertainty in India. With some bold policy moves (NRE FD’s and FCNR scheme) and good luck (falling oil prices) the RBI was able to reign in the fall and stabilize the foreign reserves situation.

But with global uncertainty in form of referendum on Britain’s exit from EU, the trajectory of Fed fund rate increases and increasing oil prices exit of RBI governor could not have come at a worse time.

The FCNR deposits of 3 years back are due for redemption between Aug and Nov of this year which would be a 20 billion USD outflow of reserves. Gold and Oil prices have bounced back from all time lows which will add to India’s woes.

If Britain decides to exit the EU then the global uncertainty will increase and any foreign firm will reevaluate their overseas investment plans which will include India.

What is most surprising is that a RBI governor who has been dead correct in warning the other federal reserves that cheap money policy is not a cure to global financial woes and has been instrumental in stabilizing the Rupee and control inflation is being let go due to political reasons – just because he decided to disagree with the government and force them to make the right policy changes he is being penalized.

Anyway the damage has been done and I would not be surprised if Rupee hits the 75 mark against the USD by November this year and if that happens SGD INR will be at 55.

However in the short term a range of 49 to 52 would be seen. For today I expect intraday volatility where after the initial fall RBI will try to stabilize the Rupee though a gradual fall in coming weeks should be expected as the international event unfold.

….. And remember 52 is not far away.

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: 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 – What’s in store for 2012

2011, what a year it has been for the global markets and SGD INR has been a party to it. The pair started the year at 35.10 and finished at 40.74 a rise of 16%. However the pair has resumed the downtrend and is trading at 39.30 as I write – a drop of 4% from the year-end close.

Let me highlight how the past analysis has fared before delving into how the pair could move in 2012.

In the first post of the series on 23 April 2011 SGD INR – Has anything really changed the recommendation was to convert to INR and invest in deposits. The exchange rate was 35.50 on the date of writing and my recommendation was it could touch 36.5. this target was achieved on 30 May 2011.

The pair continued to move along the interest rate parity line and Tax Adjusted rate line for next 6 months before Rupee began its downslide in Sep 2011 due to weakening economy, uncontrolled inflation and financial turmoil in the global markets.

As Rupee slid from 48 to 54 against the US Dollar (USD) in the next three months its slide against the Singapore dollar was 37 to 41 – drop of 10% against either currencies.

When SGD breached 39 the prediction was for it to ride the momentum and cross 40 SGD Breaches 39 mark, Eyeing 40.

The prediction came true and Rupee went all the way to 41. In the post on 27th Nov 2011 the prediction was made for a pull back with pair ranging between 38.75 – 39.06 40 breached, What’s Next  which is on track as the pair is moving towards the 39 mark.

In the mean time a very interesting development happened as Reserve Bank of India (RBI) deregulated the NRE deposit rates to boost foreign currency supply in the market Now NRE Deposit yield 9.25%, and yes its Tax Free.

Having looked at all these factors here is my take for 2012 (stay tuned for updates every quarter, its very difficult to take a long term view in such volatile markets)

  • INR should strengthen against all currencies and SGD would be no exception.
  • On an Interest rate parity analysis SGD converted to INR and invested in an NRE account would grow to 43.25 in a years time at todays conversion rate of 39.5. The Rule I follow is to convert whenever the actual rate is above the implied rate line
  • With NRE deposits becoming tax free repatriating money in and out of India is easier
  • With Rupee strengthening the gains should be compounded for any investments made in INR

So unless you feel that SGD is headed towards a Rs45 mark in the next year investing in INR is sure to yield good return.