Saturday, December 31, 2011

What to expect in 2012: Rupee, India Inc, Ambani brothers, jobs, travel and more


The most basic factor that determines the currency value is demand and supply. The US dollar is a reserve currency and is gaining strength across the world.

A 22 per cent fall in the value of the rupee in 2011 has generated a lot of interest in prospects for the rupee going forward. After all, a weak currency is not good if you plan extensive overseas travel, shopping abroad or fund expenses overseas of your loved ones. As a consumer, you would want the currency to remain strong.

Analysts believe that the rupee could remain under pressure till March 2012 and then appreciate.

“The rupee is expected to appreciate to Rs 48.5 per US dollar by end 2012 as the domestic economy gathers momentum leading to FII inflows,” Dun & Bradstreet, a data firm said on Thursday in an optimistic note.

Credit Lyonnais Securities, an influential foreign brokerage, expects the rupee to fall to Rs 60. It is already advising its clients to cut exposure to Indian equities.

For the rupee to strengthen, India needs to get more foreign capital flows and have strong macro-economic fundamentals.

In 2010, foreign institutional investors or FIIs injected $ 29 bn in Indian equity markets. In 2011, they pulled out $ 242m.

FIIs have been a patient lot. They have seen their investments in India erode in value. In 2011, the BSE sensex shed 22 per cent value in rupee terms. However, as the rupee fell sharply since July 2011, the BSE sensex has shed 36 per cent in US dollar terms. Yet, FIIs have not been selling heavily in the market. They have barely taken out $ 242m during the whole of 2011. They have stopped buying Indian equities though.

A falling currency and dithering macro-economic fundamentals would unsettle FIIs sooner than later.

A weak rupee has resulted in foreign exchange losses worth Rs 4,800 crore in the July-September quarter for 50 companies that make up the NSE NIFTY index. They wiped off close to 8 per cent of their profit before tax (PBT), a study by rating agency CRISIL revealed.

Hence, if the rupee continues to fall, it would hurt company profits further. This makes Indian equities unattractive.

The other avenue for foreign flows is foreign direct investment. Prospects for a significant amount of FDI are dim considering the political resistance to FDI in multi-brand retail, aviation and financial services. The government is not able to take a decision to push FDI as it faces opposition from its own allies.

Macro-economic indicators weakening further

India’s fiscal deficit will surge by the end of March 2012. It is likely to be even bigger by March 2013. The Indian government spends more money than it earns as tax revenue. Subsidies on food, fertiliser and fuel are expected to cost much more than originally expected. On Thursday, the government announced plans to borrow more. The original central government target for the fiscal deficit was 4.6 per cent set in the budget of February 2011. Analysts now expect that to go close to 6 per cent of gross domestic product. This makes the central bank print more money to fund the government borrowing. It eventually hurts the rupee value as supply increases. Central banks around the world typically raise interest rates to strengthen currencies. RBI has hiked rates 13 times since March 2010 to fight inflation. However, this has not helped the rupee in any way.

RBI has introduced some measures to curb speculative foreign exchange trade and allowed banks freedom to set interest rates on non-resident Indian savings and fixed deposits. After all, remittances from overseas Indians stood at $ 58 bn in 2011, according to the World Bank data, the highest for any country. However, many analysts have pointed out that these measures do not address the fundamental issues of demand and supply.

India is also a net importer. Hence, it runs a current account deficit. With the Indian manufacturing output contracting by 5.1 per cent in November 2011, it would hurt exports going forward. If exports fall, that would bring even less dollars into the economy.

The most basic factor that determines the currency value is demand and supply. The US dollar is a reserve currency and is gaining strength across the world. It has touched a new 11-month high against the euro on Wednesday.

As things stand, there are no signs of a resolution in the European debt crisis. This means, in the short-term, the global demand for the US dollar is expected to stay strong. This would affect the rupee value too. If the US dollar gains against major currencies, it is bound to gain against the rupee.