Yes unless fundamentals are sound, why india? Hot Money Has Fled, But Don’t Panic Yet The rupee’s current acrobatics isn’t bothering foreign investors of the serious kind. What’s bothering them is the ham-handed efforts to prop up the rupee Don’t Panic. It is said in large letters on The Hitchhiker’s Guide to the Galaxy. I’m no monetary authority; I can’t claim to know more than very important central bankers or finance ministers . However, I will stick my neck out and say that if you’re the kind who looks at the medium to long term, the meltdown in Indian stock markets and the rupee, like all bad things, isn’t going to last forever. It isn’t the end of the world. Dollars Flee to Home Base Let’s take it from the top. Remember those years around 2009, when Europe and the US were down in the dumps, and emerging markets — including India — were booming? When Brazilians were talking about something called currency wars? What’s happening now is the other side of the factors that drove the Brazilian real to unreal highs, and fuelled an equally unreal spurt in Indian stock markets. Rich countries , since the crisis of 2008, dumped trillions of dollars into the global money markets — just in its last round, the Fed alone pumped over a trillion; add the billions from the Bank of England and the ECB, and then add Japan in its Abenomic frenzy. So here’s this vast amount of dollars sloshing around with nowhere to go — it ended up in emerging markets, gold, commodities, creating credit bubbles from Turkey to Turkmenistan. The point of the QE exercise was to help rich countries get out of recession. The idea being that once they returned to growth, they’d be able to soak up the excess liquidity, and the free money would evaporate into some sort of monetary cloud. It might take up to three to five years, but after that global currencies are expected to stabilise and reflect their fundamentals. Now, that process has begun. The US is looking up, Europe is stabilising , and even the bleeding eurozone is on the road to recovery — today, European equities, at their lowest point, are looking rather attractive in valuations, compared to say Indian or Thai equities. There’s really very little the RBI can do to face down the tsunami of excess dollars now fleeing back to home-base . They Had it Coming Meanwhile, why is India one of the worst hit? The problem with India is not its fundamentals, or high levels of consumption, or interest rates. Simply, Indian authorities in their infinite wisdom decided they could fund the current account deficit with FII inflows — now that, to use a simplistic analogy, is like paying your monthly bills with money borrowed from the moneylender, and not from your savings — or capital — account. FII money, everyone knows, is meant to go where the returns are – right now, that’s back to the rich countries. The question everyone is asking is: can India manage to pay its household bills in a more sustainable way in future? Because the hot money ain’t coming back in a hurry, not unless the rich world goes into another recession. Where I’m at an utter loss, is that this business cycle, like the laws of gravity, was pre-ordained and predicted for years. The only question, like Ben Bernanke’s tapering, was about the timing. What on earth were the Indian authorities doing in the past three years? I have nothing against capital controls: Brazil used it in the past, Cyprus used it, even the Swiss have played with it to some extent. Every government has the right to — but not in a state of panic. If they’d wanted capital controls, or import curbs, they should have done it at least a year and a half ago. It’s too late now to hold back the flood. Wait and Watch Looking at it from the outside in, I’d say never mind gloomy forecasts and downgrades, those are for the immediate future. The rupee’s current acrobatics isn’t bothering foreign investors of the serious kind, those who have a five-year horizon at least. What is bothering them is the ham-handed efforts to prop up the rupee, creating a vicious cycle of uncertainty. Uncertainty is what investors absolutely abhor. Instead of trying to prop up the rupee, if the powers-that-be worked on keeping it within a range for a period of at least three months, I suspect, a lot of forex would happily return. Take NRI remittances, which the government is so keen on. If I’m getting a rate of interest of 9%, but the rupee has dropped by 13%, I lose money. So I’m waiting to see what level it stabilises at before I remit any more. Let’s wait and watch for now, until the rupee finds its real level. If that is 70 to the dollar, or even 75, so be it. As long as it stays range-bound , one can still do business. Meanwhile, about the only sensible response is not to panic. Not yet.
Posted on: Sat, 24 Aug 2013 02:55:38 +0000
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