Friday, June 22, 2012

Rupee Fall: No capital flight, only speculation - II

The current fall in the Rupee is purely speculative as there are no signs of flight of capital.

This is very similar to the situation in April 2009 – when the Rupee was making new lows even as inflation was coming down, corporate profitability was improving and stock markets had just broken out of bear market lows.

Consider this:

  • The foreign exchange (Forex) reserves as of June 15, 2012 were around Rs 16000 Cr, around Rs 2000 Cr higher than a year ago, and Rs 200 Cr more than a week prior. Not only is the Forex situation comfortable; in fact India’s Forex reserves have been on a slow uptrend over the past year.
  • FII remains long-term bullish based on equity inflows, with massive net inflows of Rs 17,000 Cr so far during 2012. Though there were net outflows in April and May of Rs 900 Cr and Rs 2,200 Cr, respectively, the amounts are minor. In the current month to date, there have been minor net inflows of Rs 1,500 Cr.

So what next?

The fall might continue a bit longer; however I don’t expect it to either fall significantly more, or have any significant negative impact on corporate profitability. The reasons for this are:

  • At some point, the RBI and the government will crack down hard on speculators and that would be the end of the Rupee fall. The RBI has already issued a veiled warning to speculative interests. The next set of measures would be far harsher. Those who seem to underestimate the absolute power that a state commands, do so at their own peril. Ask Vodafone.
  • Oil and all major commodities are down more than 25% from about a year ago and are on a sharp downtrend. That will cushion the impact of the rising rupee.
  • With corporate India posting a robust 20% growth in bottom-line for the March 2012 quarter, a robust economic recovery is well underway. With improving economic fundamentals, it would be just a matter of time before the speculative positions in the Rupee start to unwind.

The situation today bears an uncanny resemblance to the one two years ago, around April 2009. Even during that time, the rupee was making new lows, even as a recovery was well underway and stock markets had broken off the lows.

With the short term economic slowdown over, and a robust recovery underway, it’s very likely that the Rupee fall would get arrested and stock markets make new highs.

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Rupee Fall: No flight of capital – only speculation