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Is falling rupee making a dent in your wallet?   Jun 14, 2013

Financial News. Simplified
June 14, 2013
In this issue
  
Weekly Facts
  Close Change %Change
BSE Sensex* 19,177.93 (251.3) -1.29%
Re/US$ 57.99 (1.1) -2.01%
Gold Rs/10g 27,860.00 290.0 1.05%
Crude ($/barrel) 102.99 0.4 0.37%
FD Rates (1-Yr) 7.00% - 8.75%
Weekly change as on June 13, 2013
*BSE Sensex as on June 14, 2013
Impact

Monsoon might have covered 50% of India providing much needed relief to those suffering from scorching heat of Indian summers. There may not be any respite as yet to Globetrotters though. They are being forced to shell out more on their foreign tours this session thanks to tumbling rupee which is going all over the places these days. It's not only frequent foreign travellers who suffer when currency depreciates; falling rupee has its bearing on all. Whoever earns in foreign currency will benefit by depreciation of rupee while those spending in foreign currency stand to lose.

Falling rupee is a positive for:

  • Indian exporters as they would earn more
  • NRIs remitting money to India since they would have to put in lesser dollars
  • Indian investors having overseas investments as their investments may generate higher positive returns in rupee terms

While it is a negative for:

  • For overall economy. Inflation tends to go up with falling rupee since India heavily depends on imported oil
  • Indian importers as the landed cost of raw materials would go up
  • Consumers buying imported goods such as cars, smartphones if companies decide to pass on the increased cost
  • Indian travellers, students planning to go abroad since they have to spend more rupees to buy dollars

Although the US dollar has been rising against most of all other emerging market currencies; fall in Indian rupee has been more acute. India runs a high current account deficit, which in simple words mean, India owes more to rest of the world than what it is entitled to receive. As per Government estimates India would need to attract investment of nearly 75 billion US dollars over next 2 financial years, including the one under process. High gold imports and subdued exports have been the major culprits of high current account deficit. The Government has been trying to arrest the slide in the rupee but all its efforts have gone in vain. Domestic economy is still weak and policy making has failed to address real concerns.

PersonalFN believes that the current slide in the rupee may get RBI thinking to maintain status quo in the mid-quarter review scheduled on June 17, 2013. PersonalFN is of the view that investors should refrain from speculating on monetary policy actions and should avoid taking any position in the market based on that.

Impact

The 'see-saw' movement in the price of gold has left many to wonder, where's the precious yellow metal headed. After witnessing a sharp dip in mid-April 2013, price of gold in India has once again risen (See chart below).

Movement of gold since beginning of 2013
Movement of gold since beginning of 2013
Data as on June 07, 2013
(Source: ACE MF, PersonalFN Research)

So, what is refraining gold from correcting vehemently, and show an impulse yet again? Well there are host of factors in play. They are:

  • Increase in import duty on gold: In the Government's endeavour to curb widening Current Account Deficit (CAD), many of you may be aware that the import duty on gold has been raised twice thus far this calendar year, placing it at 8% at present. But such a move would increase the landing cost of gold. In fact the World Gold Council (WGC) has also said that curbing gold import may have short-term benefit in containing demand, but cautioned that consumers' appetite for yellow metal will ultimately be fulfilled by the unauthorised grey market.

  • Depreciating Indian rupee: With the Indian rupee having touched a low of 57.07 (as on June 7, 2013) and appearing weak yet; prices of gold in India could remain firm as that also increases the landing cost of gold. To read more about this news and the view of PersonalFN over it, please click here.

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Impact

The line is thin between strict regulation and over-regulation. Red-tape and bureaucracy has been a part of any system in India. Often policy changes are introduced when there's no other option left. However, there are exceptions too. Grappled with a conundrum of falling Rupee; the Government is trying to woo foreign investors in an attempt to attract inflows of foreign capital. A committee appointed under the chairmanship of former cabinet secretary, Mr K.M. Chandrasekhar has presented its recommendations which aim to simplify the processes to be followed by foreign investors.

Some key recommendations include:

  • Allowing Foreign Institutional Investors (FIIs) and sub-accounts to invest without seeking any prior approval
  • Creation of a separate category of Foreign Portfolio Investor (FPI) and make them register themselves with Designated Depository Participants (DDPs)
  • Dividing foreign investors into three categories based on risk; Central Banks and Sovereign funds being the least risky
  • Easing norms for foreign Venture Capital (VC) investors

PersonalFN is of the view that, recommendations, if implemented, would help in doing away with procedural hindrances which might have been repelling foreign investors so far. Moreover, it may make a job of the regulator less complex. The Indian equity market is underpinned by high foreign shareholding. When FIIs turn bearish on India, markets tumble. The recommendations, if implemented, would assist in attracting more foreign capital, which is a must to support falling rupee.


Impact

As many of you might be aware, when interest rates fall, bond prices rise and investors of debt funds gain. This is a basic principle on which debt funds work. However, debt funds are not risk free. Primarily they carry two risk; default risk and interest rate risk. It is believed that gilt funds, a category of debt funds, are virtually free from risk of default as they are backed by sovereign guarantee. Savvy investors play them as a proxy on interest rate movement in the economy. In the current scenario where it is almost taken for granted that RBI would continue to cut rates, whether to invest in guilt funds is tricky. Let's first understand what makes the debt markets confident that RBI would almost certainly continue to cut policy rates. To read more about this news and the view of PersonalFN over it, please click here.


  • Sell in May and Go Away is an old proverb in the west which suggests that those who sell their equity holdings in May are usually better off. Indian retail investors seem to be following it religiously. Equity oriented mutual funds witnessed massive redemption pressures in May which were at an eight-month high. In May, investors pulled out of equity oriented mutual funds selling units worth nearly Rs 2,900 crore. Indian mutual fund industry has been sailing through hot waters since the equities ended their dream bull run in January 2008. Barring few instances of aggressive buying, retail investors have been exiting equity oriented mutual funds and even abandoning their Systematic Investment Plans (SIPs).

    PersonalFN is of the view that the recent redemption pressure was on the back of sideways movement of equity markets and dimmed hopes for fast economic recovery. However, PersonalFN believes that long term investors should not try to time the market or get influenced by short-term trends in the equities. An intelligently devised asset allocation plays a pivotal role in success of an investor.


Convertible Currency: A currency that can be readily bought or sold without government restrictions, in order to purchase another currency. A convertible currency is a liquid instrument when compared to currencies tightly controlled by a central bank or other regulating authority.

Source: Investopedia
Quote : "Gold is not going to fade away and just become another useful metal."   - Donald Hoppe

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