Rupee at 51: Will Asia’s worst currency continue falling?

What a volatile week it has been for the rupee. The partially convertible currency hit 51 against the dollar early on Friday, after closing at around 50.90 per dollar on Thursday.

It’s a 33-month low for the currency and the consensus is that the rupee will keep sliding for a while due to a combination of unfavourable global and local factors.

One of the most pessimistic predictions issued yesterday was by Laurence Balanco,technical analyst at CLSA. He told CNBC TV-18 the rupee could dive all the way to 58 against the dollar if it fell to the 52 mark.

While that might seem a little extreme, the fact is most experts believe the rupee’s slide is set to continue, at least in the medium term.

That the rupee is falling against the dollar is no surprise. Reuters

According to The Wall Street Journal, the Indian rupee is the world’s third-worst performing currency this year, falling by nearly 14 percent , next only to the Turkish lira, which is down 17 percent and the Kenyan shilling, which has lost 15 percent. It is also Asia’s worst-performing currency, the newspaper added.

What’s happening to the rupee?

The reasons for the rupee’s slide are not difficult to understand.

One, the never-ending sovereign debt travails of the eurozone continue to keep global investors on edge, who, as a result, continue to pull money out of relatively riskier emerging market assets and dive into safe havens like the US dollar. Indeed, some experts have said there is an increasing scarcity of dollars in the currency markets, given that everyone is scrambling to play it safe.

Two, a slowdown in the local economy, coupled with high inflation, is muting the prospects of corporate earnings, which is putting off foreign investors. Higher demand for local assets typically boosts demand for the local currency and thereby leads to the currency’s appreciation.

Foreign investors have only bought $663 million worth of Indian equities this year, sharply down from the $29 billion they invested in 2010, according to data from the Securities and Exchange Board. Not surprisingly, the benchmark Sensex is also down 20 percent this year. Capping the bad mood was Shankar Acharya, former chief economic advisor to the government, warned the economy could expand below 7 percent in the year ending March 2012. Other economists believe growth could be between 7-8 percent.

Three, India remains a net importer of foreign goods, and a third of that consists of oil imports. According to TV reports, oil companies import about $6 billion worth of crude every month.

A falling rupee will increase the cost of imports (in local currency terms), which increases the current account deficit, which is the trade deficit plus interest payments and other transfers. The trade deficit is the difference between exports and imports.

The current account deficit can be funded either through foreign direct investments or foreign portfolio investments (in equity/debt markets). But as we all know, foreign investments in local assets such as stocks have been low. Meanwhile, the current account gap continues to widen, which worries investors.

Four, with foreign currency reserves of $311 billion (at the end of September) and imports worth about $35 billion for the month, India now has the lowest import cover of 8-9 months. This is the lowest in the last decade, according to an opinion piece in Business Line. That worries investors because with the increasing cost of oil imports, there will be further demand for the dollar, which should drive down the value of the rupee further.

Five, hopes that the Reserve Bank of India (RBI) will intervene in the foreign exchange market to boost the rupee have dimmed after Deputy Governor Subir Gokarn said earlier this week that the central bank did not plan on changing its policy of intervening in foreign-exchange markets only in times of excessive volatility. That means investors can’t expect the RBI to swoop in and lift the rupee every time it hits a new low against the dollar.

All things considered, expect the rupee to keep going downhill for a while.

Source: Firstpost.com

Thanks,

Neha K. Mehta

DENIP Consultants Pvt. Ltd.

Oil drops as OPEC to increase Production

Worried that oil prices near $115 a barrel are hitting economic growth, Gulf producers including Saudi Arabia favor an increase in output when the Organization of the Petroleum Exporting Countries meets on Wednesday.

OPEC delegates gathering in Vienna said a deal to do more than close the gap between the official output target and actual production -- about 1.4 million barrels per day -- could prove difficult due to opposition from price hawks such as Iran and Venezuela.

Oil prices leading up to the OPEC meeting have been fairly rangebound, with Brent crude trading between $114 to $117 a barrel over most of the past two weeks.

Brent crude for July delivery fell $1.36 to settle at $114.48 a barrel, the weakest close in nearly two weeks, in light trading that saw volumes about 25 percent below the 30-day moving average.

U.S. July crude fell $1.21 to settle at $99.01 a barrel, the lowest close in two weeks, with trade volumes about 30 percent below the 30-day moving average.

DOLLAR, STORMS

The dollar recovered against the euro and the dollar index .DXY also turned slightly higher, after early weakness had supported dollar-denominated oil prices. U.S. stocks ended lower and the S&P 500 slumped to its lowest level since March on signs of a slowing economy.

"Today's lower (oil prices are) largely related to the usual bearish combo of stronger dollar and a soft stock market," Jim Ritterbusch, president at Ritterbusch & Associates in Galena, Illinois, said in a note.

"Some positioning ahead of the upcoming OPEC meeting also likely prompted some selling as some key oil ministers appear to be sending out overtures of an increase in production quotas," said Ritterbusch.

Additional pressure on prices came on news TransCanada Corp's (TRP.TO) restarted its 591,000 barrel-per-day (bpd) Keystone crude oil pipeline on Sunday.

The market was also watching a low pressure system in the northwestern Caribbean Sea, which the National Hurricane Center said had a 50-percent possibility of becoming a tropical cyclone developing over the next 48 hours.

A few computer models forecast the Caribbean system to move northwest over western Cuba and reach the U.S. Gulf of Mexico, potentially threatening offshore oil and natural gas production, over the next few days. Other models forecast it to move northeast toward eastern Cuba and the Atlantic.

Ahead of closely watched weekly U.S. inventory reports from industry and government, U.S. crude oil inventories were estimated to have fallen slightly last week, a Reuters poll of analysts on Monday showed. Gasoline and distillate stockpiles were expected to be higher.

POTENTIAL SUPPLY THREATS

Traders also eyed ongoing turmoil in Yemen and Syria. The United States called on Yemen to move toward democracy while President Ali Abdullah Saleh recovers from shrapnel wounds in Saudi Arabia. Yemen's acting leader insisted Saleh would return in days.

Syria's government said it will respond firmly to armed attacks after state television said gunmen killed more than 80 security members in a northwestern town.

The Nigerian army said it was investigating a purported threat by the Niger Delta's main militant group to attack oil industry facilities in the OPEC nation

Source: reuteres.com

Vivek Agrawal

Summer Intern-Fundamental Analysis

DENIP Consultants Pvt. Ltd.