| Abhishek Goenka |
2012 has been a very volatile year for the global as well as the local markets. With major events like prolonged concern over Euro crisis, FED QE3, US Presidential Election and many more had made the markets witnessed volatile moves.
Talking about India, the year started with a big bang as the government and RBI policy to lure the investors fetched about USD
The Indian economy has witnessed record inflow from the FII’s. The sum total of flows into the equity and debt markets surpassed almost $26 billion till 11th December 2012. With a couple of weeks left for the new year, the markets are seen getting huge flows largely driven by the liquidity exercises by various central banks across the globe.
Looking at the history of the Indian rupee, from 1973 until 2012 the USD INR exchange averaged 30.65 reaching an historical high of 57.33 in June 2012 and a record low of 7.19 in March of 1973. The poor macro economic fundamental, rising fiscal deficit and current account deficit, which is highest among the Asian countries, are the factors responsible for the havoc created in the local currency market. The international factors cannot be blamed completely for the deteriorating rupee; it’s been the lack of management of the deficit that had been accumulated over the years, which is resulting in slowing economy growth.
The Indian rupee has weakened 2.6 per cent from the year start on account of the poor macroeconomic fundamentals. The story of twin account deficit continues to exert pressure on the local currency. The rupee was seen reaching the record low of 57.33 levels against the dollar on the back of poor fundamentals and uncertainties in the global markets.
The policy makers can’t blame international developments for all the ills. The ignorant behaviour is the primary reason for the macro-economic conditions deteriorated over the years – be it the current account deficit, or the fiscal deficit. It was taken for granted that overseas investors will forever be pouring money into India, irrespective of its macro-economic conditions.
The slowing industrial production and sticky inflation have also paved the way for rupee weakness. The Indian economy has held current account deficit since a long time and this is considered as one of the primary reasons for the rupee weakness.
Instead of praying for the international economic situation to improve, currency policy makers should be upbeat in implementing the policy reforms to get the economy back on the track. The rupee has been the worst performer among emerging market peers in Asia. After recovering from new lows in December 2011 and early January 2012, the rupee started recovering against the dollar. The local currency appreciated from 54 levels to 48.60 levels, a close to seven per cent appreciation.
This was largely because foreign portfolio investors started pouring in huge funds. The global Indians too invested in NRI deposits offered by Indian banks as the central bank liberalised the interest rates offered on these deposits, which were nearly five times more than what the western world was paying.
However, the rupee’s gains started reversing from late February, touching new lows visa-vis the US dollar in the last few days. This is largely because on the one hand, foreign portfolio investors have started going slow on investments into the country – in the month of April, they pulled out close to $1 billion from the Indian markets – on the other hand, the country’s import bill too has risen due to higher crude and commodity prices amid a slower growth in exports. The trade deficit has widened also because exports did not manage to keep pace with imports as developed markets are yet to fully come out of recession.
The trend in the rupee is also reflective of India’s huge fiscal deficit as well as the current account deficit among emerging Asian peers. India’s combined fiscal deficit, including that of state government, has risen sharply.
The wide fiscal deficit and a heavy debt burden are the most “significant rating constraints” to the country’s sovereign rating according to the rating agency Standard & Poor’s. Repeating its warning that India faces a one-in-three chance of being downgraded to junk over the next 24 months. India has a BBB- rating from S&P, the lowest investment grade among the BRIC economies.
With the up-coming elections in March 2014 – and the current political gridlock, we expect only modest progress in fiscal and public sector reforms. A rating downgrade is likely if India’s economic growth continues to underperform its external position deteriorates, its political climateworsens, or fiscal reforms slow.
India, Asia’s third largest economy grew at its slowest pace in three years at 5.3 per cent in the September quarter and is on track to post its weakest growth in a decade. Talking about the reforms, the government managed to secure majority votes in both the houses, increasing the market expectation of further more reforms to be passed on banking, Insurance and pension sector. As said earlier, with just a year left for the central election and economy growth slowing down, the Foreign direct investors will refrain from pumping in huge flows in the nation till the economy shows signs of bottoming out.
Looking at the global factors, which also impact on the movement of the local currency are seen stable. But the concern has not ended with no concrete solution made over Euro debt and the concern continue over US fiscal cliff.
The “fiscal cliff” impasse is raising the odds that Congress will fail to meet a year-end deadline to avert steep tax hikes and budget cuts that could push the nation into another recession. With talks between President Barack Obama and House of at an apparent standstill it is likely that the leaders won’t be able to reach a deal before January 1, 2013.
The resulting $600 billion hit could push the economy back into recession, but the full effect likely would not be felt for months – giving legislators some time after the New Year to resolve the situation. Even though the economy would likely not take an immediate hit if lawmakers miss the deadline, failure to reach a deal could spook financial markets, which have been relatively calm in recent weeks. So we could see a volatile market in the new year.
Many economists believe that the economy could withstand a brief slip over the cliff because the impact of tax increases would be felt gradually. However psychologically the consequences may be severe especially if stocks fall sharply. With just over two weeks to go before the end of the year, each day that passes without a deal could mean more pressure for currencies and equities. More stimulus from the Federal Reserve failed to boost the investors sentiments.
The US central bank committed to monthly purchases of $45 billion in Treasuries along with the $40 billion per month in mortgage-backed bonds it started buying in September. Bringing their total monthly purchases to $85 billion. The investors are focused on the Fed’s new approach of linking its policy to a drop in jobless rates, fearing that the Fed might withdraw its economic stimulus if the job market improved dramatically in the months to come.
The chances are higher of monetary policy reversal as the unemployment is seen reducing in the last few months. The US companies added 146k jobs in the month of November, exceeding the estimates. Between Hurricane Sandy and fiscal cliff concerns, the market was looking for an addition of only 85k jobs. The unemployment rate dropped to 7.7 per cent, its lowest level since December 2008. The closely watched US underemployment rate also fell to 14.4 per cent from 14.6 per cent.
The European Central Bank (ECB) in its final press conference for the year 2012, downgraded their 2012 and 2013 growth forecasts along with next year’s inflation estimates and warned that the risks are to the downside.
Coming back to the Indian rupee, we continue to hold our bullish view on USD INR. The US dollar Index seems to have bottomed in 2011 near 73 levels and could rise to 90 levels. High risk aversion and positive economic numbers compared with its peers countries may push the US economy to stronger levels. The dollar index going above 85 levels could add to the woes and push rupee close to 58-59 levels again.
Checking out the impact of a weak rupee on pharma ceutical industry, recovery of sales in the US and in the global pharma business and the rupee’s decline have enabled pharma companies in India to come out with a strong performance in the March quarter, one of the best in recent times. The rupee depreciation further will continue to benefit the sector as between 60 to 80 per cent of its revenues come from exports.
We expect the pharma sector to remain in focus on account of Obama back in power, benefits of Patient Protection and Affordable Care Act which will be a reality without any hassle, the benefits of which will directly flow down to leading generic players.
The pharma stocks have also outperformed the broader market over the past several months on the back of the rupee depreciation and several companies announcing FDA approvals and drug launches in the US.
The government’s recent decision that all foreign investments in existing domestic pharma firms should be allowed only after clearance by the FIPB, amid mounting concerns over availability of affordable essential drugs in the wake of multinationals acquiring local companies. After a series of criticism over the government’s decision the Prime Minister Manmohan Singh said that the government is trying to bring greater clarity on allowing foreign capital inflows in the domestic pharma sector.
It is largely argued that the India is already FDI-starved, any policy which restricts freedom of trade and investment will further restrict capital flows in the sector.
Still, rupee depreciating to 57-58 levels by mid 2013 would surely help the sector and the boost the overall performance, on one condition: if they maintain a proper risk management policy.