Indian rupee, equity, debt markets have analysts at odds and evens: Anindya Banerjee

Indian rupee and Indian equity and debt markets are not moving in sync and we believe that is causing…

indian rupee vs us dollar
The rupee was lower by 10 paise in early trade on Tuesday. (AP)

Indian rupee and Indian equity and debt markets are not moving in sync and we believe that is causing much bewilderment amongst the financial market participants. However, we for that matter, find no disconnect between the two. Over the last six months, we have said a number of times that as the shift happens in the source of the carry trade funding away from the US Dollar towards the Yen and the Euro, so will change the correlation between the Rupee and the domestic financial assets. A stronger US Dollar is no longer a bane for the risky assets, especially from the emerging market space. Infact, it can be argued that a stronger US Dollar, which means a weaker Yen and Euro, could be a chief reason why the global financial markets are continuously defying gravity generated by a weak global economy. Therefore, a broad based strength in the US Dollar is having a spillover effect on the Rupee. However, on a REER and NEER basis, we are still appreciating, as our peers are weathering much rougher times against the Greenback. Over this week, Rupee has weakened against the US Dollar but traded firm against other currencies, like the Euro, Pound and the Yen. Against the US Dollar, Rupee has weakened to a fresh multi month low of 62.24 levels, basis offshore spot reference, New York cut-off.

Importers and state run banks have been on the bid in the Greenback for most of the week. Exporter offers and sale of USD from FIIs did little to dissuade the Dollar buyers. Some large option traders were seen to be covering short Gamma exposure in the market, sensing an expansion in the trading range from currently 61.00-62.00 to 61.50 and 62.50/62.80 levels. Corporate inflows were noted from a couple of utility companies but that did not have much impact on the USD/INR.

Indian economic growth slipped from 5.7% to 5.3% in Q2 FY15 or the previous quarter. In the September quarter, manufacturing sector grew 0.1 percent as against 3.5 percent in June quarter. Agricultural growth, during the quarter fell to 3.2 per cent from 3.8 per cent in the preceding quarter. Capital formation growth — an indicator of investment activity in the country, computed as a ratio of investment to GDP — remained low at 32.3 per cent, falling marginally from the previous quarter’s 32.7 per cent. Growth in government expenditure slipped to 11.7 per cent from 13.4 per cent in the April-June quarter. However, it remained high, contributing to GDP growth. It is to be noted that government expenditure might not be able to contribute in the second half, as GOI is looking to slash expenditure to meet the GFD target of 4.1%. Mining and quarrying growth slowed to 1.9 per cent from 2.1 per cent. Electricity, gas and water supply growth was down to 8.7 per cent from 10.2 per cent. Financial and real estate services growth too fell to 9.5 per cent from 10.4 per cent. All in all, it was not surprise that economic growth has slowed in Q2 from Q1, as weak IIP growth, poor monsoon, slowdown in exports and not so impressive services PMI were an omen that growth would have slowed in the previous quarter. In Q3, base effect will be favourable which can provide a statistical bump. At the same time, the recent increase in project clearances should start having positive impact on growth in the coming months. However, economic acceleration might have to wait for some more time, as economic dividend of lower oil prices and policy urgency slowly percolate down through the economy.

In a surprise move, GOI has scrapped a rule mandating traders to export 20 percent of all gold imported into the country. However, GOI has said that import duty would not be altered any time soon. RBI in a notification, said that it has been decided by the Government of India to withdraw the 20:80 scheme and restrictions placed on import of gold. We welcome the move from GOI as we always believed that matured regulation is about removing distortions in the economy and the financial markets. The erstwhile measures of restricting gold imports were distortionary and was never a solution to alter the pattern of savings in India.

We do not see a trade-off between bullion and financial assets, as the former has always existed as an important form of valuable asset in the portfolio of Indian citizens. Gold is a superior form of alternative currency which has universal appeal and value. Like a true global currency, it competes with the modern day fiat currencies, like the US Dollar. Gold is both a store of value, a medium of exchange and also a unit of account. Gold forms a counter balance against the inflationary forces unleashed by the global monetary system and also serves as a rainy day asset for the unbanked population of the country. Over the last so many decades, allocation towards and gold and financial assets have happened simultaneously and there is no significant exploitable trade-off between these two assets in India. Gold can only become a significant trade-off to financial assets, if there is a crippling crises of confidence in the domestic financial system or in the fiat currency, the Indian Rupee. Therefore, as long as the policymakers continue to pursue quality economic growth, through enhancement of productivity and low monetary inflation, we see little merit in worrying about the diversion of investible surplus into gold. Gold is money and hence having it in private as well as in the official reserves improves the financial stability of India.

The near collapse in the global petroleum prices are providing India with an economic dividend. With the country consuming over 1 billion barrels of crude oil very year, if oil prices average 30/40 dollars/barrel lower than previous year, then it amounts to nearly 2% or slightly more of economic stimulus to the nation. The benefit flows both to the government and the private sector, as amount of subsidy and the cost of producing goods and services decline. Consumers benefit from lower prices of petroleum products and the lower prices goods and services. It can be seen as a transfer of wealth from the producers of crude oil to the consuming nations, like India.

In the economic data released over this week from the major global economies had more misses than hits. German business confidence measured by IFO improved in November, for the first time since April of this year. Generally ZEW leads the IFO and hence a sharp upswing in ZEW readings for November had indicated that a stronger than IFO was in store. US economy grew at 3.9% in Q3 2014 from 3.5%. Personal consumption rose 2.2% and GDP price index rose 1.4%. Private investment and consumption expenditure of private sector and public sector enabled US economy to grow faster in Q3. US durable goods orders were weaker than expected as the core number contracted in October. US personal spending for October, regional economic survey for November, home sales over the last month and consumer sentiment statistics all failed to beat the consensus print. In Euro zone, consumer inflation statistics from Euro zone nations were subdued and the credit growth and money supply measures were weaker than median estimates. In Japan, household spending contracted in October and consumer inflation declined from 2.5% in October to 2.4% in November. Japanese retail sales were weaker than expected for October.

Over the next week or so, apart from the oil market, traders will pay close attention to the heavy docket of economic releases from major economies around the globe. The final cut of the business surveys done by Markit (PMI) for the month of November will be released for major economies. At the same time, US ISM economic surveys, November jobs data and then factory orders will be scrutinised closely. We expect a strong jobs growth in US, between 230,000-270,000 jobs additions for the month of November, with the unemployment number likely t have fallen to 5.7%. In India, all eyes will glued to RBI HQ, where interest rate decision will announced on Tuesday. There is a strong clamour for the reduction in the repo rates. We see the possibility of cut in the HTM and/or the SLR rates as well. We expect a dovish stance from the RBI. The interplay of deflation in hard assets and inflation in financial assets is keeping Indian macro story well placed. Therefore, over the course of medium to long-term, we see a strong possibility that monetary policy in India can remain accommodative. Therefore, we can continue to see money flow into the long term bonds, which can keep the yields lower.

Indian Rupee can continue to show slow depreciation, with 61.60/80 as the lower range against USD and 62.40/50 as the upper bound of the range. Lower oil prices is providing RBI with the elbow room to allow Rupee to devalue, without worrying about inflation. Therefore, we would not be surprised if RBI allows the range in USD/INR to expand on the way up, to provide benefit to the exporters. However, like in the past, we would continue to favour Rupee against the Euro, Pound and the Yen. Wish you all a successful trading week.

By Anindya Banerjee, analyst, Kotak Securities

Get live Stock Prices from BSE, NSE, US Market and latest NAV, portfolio of Mutual Funds, Check out latest IPO News, Best Performing IPOs, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Financial Express Telegram Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.