Expect Indian rupee upside to remain capped: Anindya Banerjee

By: | Published: April 18, 2015 7:49 PM

Indian Rupee continues to behave like a pegged currency against the US Dollar (pun intended). With such low volatility in the spot market...

carpool, sharing economy, carpool in india, personal financeA sustained appreciation in the Indian rupee without commensurate improvement in productivity in domestic economy may become an Achilles heel for our exporters.

Indian Rupee continues to behave like a pegged currency against the US Dollar (pun intended). With such low volatility in the spot market, it has come as no surprise that options on USD/INR contracts on exchanges as well as on the inter-bank market have seen their premium come off sharply. Option contracts are like insurance policies, where the premium is market driven and greatly influenced by the volatility in the cash market. Greater the underlying volatility, higher the premium one has to pay to buy the insurance policy, aka option contracts. Historically, March and April have been quiet months for the currency. However, the same seasonality study have also shown that between May-August, Rupee have seen many sharp moves, many against it. The question is whether this year, we would see seasonality play out and trigger these two kinds of trends in the Dollar/rupee market? I am betting on at least a sharp rise in the volatility of the Rupee and with the central bank showing significant resolve to cap its upside, any major global risk event can trigger a short devaluation phase. A move back to 63.50 or even 64.00 would not be such a bad thing, as it would provide an extra-cushion to the exporters, especially when they are facing the headwinds of a very strong currency, especially against the non-Dollar currencies. It should be noted that, apart from North America, Europe and Asia remain as major hub for our exports of goods and services. Therefore, a sustained appreciation in the Rupee without commensurate improvement in productivity in domestic economy may become an Achilles heel for our exporters.

This is not the first time I have talked about headwinds facing our exporters and therefore, it has come as no surprise to me to see export growth contract the way it is doing. Before I go into the external trade data for March and rest of the last financial year, we have to make a note that India’s export of petroleum products constitute nearly a fifth of its overall merchandise exports. Therefore, as petroleum prices have collapsed over the last twelve months, value of its exports have also got hit. There is little anybody can do to offset that decline in gross exports. However, as far as petroleum goods are concerned, we import more in value terms than we export and hence we have enjoyed a net benefit in our merchandise trade balance.


Indian exports at USD 310.5 billion for 2014-15 missed the annual target by 11.52 per cent as March quarter shipments saw a steep fall of 21.06 per cent. However, a detailed break up of data available till last February suggests that during the first eleven months of FY 16, non-petroleum exports grew a little more than 2% compared with last year, which does not change the sorry state of our exports. Global economy is going through a long phase of deleveraging which is bound to have adverse impact on exports. In fact, before the great deleveraging phase began in 2007/08, global trade on average clocked a growth above the growth registered by the world economy. According to the WTO, the annual average trade growth recorded since 1990 has been 5.1 per cent a year. However, since 2011/12, global trade has been growing at a pace less than the global economy, and over the last calendar year it has only managed a growth of 2.8%. WTO had initially predicted a growth of 4.00% for 2015 but now they revised it down to 3.3% and warned further downgrades are possible.

Over the past one year, I have written a number of times why I expected global growth to continue to muddle through and what it means for Indian economy. In that regard let me add a few more lines to that topic. According to my opinion, 2007/08 was a great reset in the global growth cycle. Here the cycle I am referring to is of longer duration and more structural in nature. Remember, larger time cycles comprise of smaller time cycles, akin to larger waves composed of smaller waves and even smaller ripples. The great leveraging tide that lifted nearly all major boats in the global economy, began somewhere around the 1980s. The many phases of digital and information technology revolution transformed the global economy and its financial markets. World has become not only more and more globalized but also more and more financialised. The financialisation lead to innovation in finance, in ways that was not observed before the 1980s. However, at the core of this financialisation, globalisation and consumerism lay the virtuous cycle of leverage, i.e., debt over debt. As private sector and public sector levered up and also productivity improved, world economic capacity grew in leaps and bounds.

However, come 2007/08, that debt driven virtuous came to a grinding halt. The subsequent deleveraging that began is in its 7/8th year and with passage of time, it has gained in momentum. Central banks, like firemen are trying their best to reverse it but they have not been much successful. The fallout of leveraged inflationary boom spanning a few decades is a long period of low inflation to deep deflation. I see it as a natural way a system heals itself. Deflation is fallout of the healing process.

However, the healing process would not be complete unless and until the excess capacity is squeezed out. Within this structural economic bear phase which began 7/8 years back, has there many short to medium length cycles of inflationary booms and deflationary busts. The impact of such cycles is playing out quite vividly in the global asset markets. During the first such down cycle occurred during 2007/08, where both hard asset prices, as well as financial asset prices declined significantly and swiftly, the subsequent response from central banks and government triggered a quick up cycle in both the asset classes that started in 2009. However, since then, there have been many episodes of frequent crises, be it fiscal, social, economic or financial. I urge you to look at these phases of up and down cycles and crises as a connected process. The connected process is being driven and shaped by the larger structural deflationary phase in the global economy. Though the character of each of the crises and adjustment phase may have been different but they are more or less symptoms of the same underlying force. It is something similar to a chronically ill person having episodes of fever and seizures. At times, the fever and the subsequent seizure could be mild and last for short duration but at other times can be far more unsettling. As long as the illness remains, so would the risk of fever and seizures.

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