Rupee

Today, lot of talk is centered around Indian Rupee which is not surprising considering the below graph.

The upward ascent of the Rupee commenced in August 2011 when INR vs USD was 46 today it is 55 which is a depreciation of 19%.  Why this sudden spike?  Is this the phenomenon with all other BRIC & some Asian countries.   

All currencies have depreciated, but It is clear that Indian Rupee has depreciated more than others (Brazil is the only exception to this rule). 

Questions asked by corporate's is why Rupee is depreciating and where it is heading to.  Let us try to find an answer to these two questions. The factors which affect Rupee are mainly as follows.

1. Foreign Exchange Reserves & External Debt - Foreign exchange reserve is currently at $293 billion which has slipped a bit from its highest levels of $320 billion in September 2011.  However  the main concern here is that of external debt which was at $334 billion as on 31st December 2011.   External Debt has overtaken foreign exchange reserves, which is not so a few years ago, see table below

The slippage of Forex reserves are fast and equally fast is increase in external debt, this will add pressure to the Rupee in the medium to long term.


2. Balance of Payments - Current account deficit especially on Merchandise has risen sharply over the years, thanks mainly to Oil and Gold (see table below).

This increase in BOP has lead to strain on Indian Rupee.


3. FII - FII flows into India has been affected since December 2012 (see table and graph below)
                                                                                                   
                                                                                                Rs. in crores

FII's have decreased mainly due to high Current Account and Fiscal deficit, lack of reforms and recent actions in taxation front (retrospective amendments and GAAR)


4. FDI - FDI flows during the years 2009-10 & 2010-11 had negative growth, however it had a positive growth in the year 2011-12.  See table below

2011-12 has been a better year but not as good as 2008-09.  However with the current policy paralysis and lack of reforms and sustained infrastructure bottlenecks FDI inflows will be under severe strain in the years to come.  GAAR which will be implemented from 2013 specifically to counter Mauritius investments will also have a negative impact on FDI inflows.


Outlook on the Rupee


As seen above the 5 major parameters of Foreign exchange reserve, Foreign debt, BOP position, FII inflows and FDI inflows, are throwing out negative signals as far as India is concerned.   If we take a look at other parameters which affect the rupee like Industrial Output, Inflation, Interest rate, GDP growth, Global Economic Scenario & Stability of Government there also signals are not "so positive".  With US economy seemingly back on rails and Eurozone breaking up more and more investments are moved back to US, which will surely put India on the back foot as far as foreign investment inflows are concerned.  Back to India, Industrial Growth is not as good as it should be, infrastructure development has not been taking place at the pace it should be taking place, there is lack of policy reforms, there is lack of political consensus,  inflation is moving up again, interest rates are refusing to come down....  What does this mean?  Rupee to continue to be under strain? looks like it.  Rupee atleast in the short term will be at levels of 55-57.  But all is not bad, a good monsoon, a revival of US economy, pull out of Greece (from the European union or bailout), will surely boost demand in India and also globally.  This will boost up the Rupee in the long term.  


In conclusion my view, Rupee in short term of 6 months will be trading in the range of 55-57, however in the long term (by end of 2012) it will return to levels of 46-48.