From the Desk of Chief Marketing Officer
Sharad Bindal
I was
willing to write this blog a month ago but failed for I was enjoying my
vacations. By the time I returned, there was already a much hue and cry about
CAD and QE3 problems- problems supposed to be the primitive reasons behind
rupee fall.
Current Account Deficit:
Let’s
first understand CAD (Current Account Deficit) as people usually misinterpret
it with trade deficit.
The
Current Account and Capital account are two components of Balance of Payments
and Current account includes balance of trade(net revenue on exports less
payment for exports) and invisibles (net investment income i.e. earnings on
foreign investment minus outflow in the form of payment to foreign investors
and other cash remittances)
The current account balance is one of two major measures of the nature of a country's foreign trade (the other being the net capital outflow). A current account surplus increases a country's net foreign assets by the corresponding amount, and a current account deficit does the reverse. Both government and private payments are included in the calculation. It is called the current account because goods and services are generally consumed in the current period.
The CAD
in India was $ 93bn in 2012, second to US in volume, we can expect a saving
from low energy prices to the tune of $ 18-20bn in FY14, India still need
around $ 70bn from capital inflows. (Though I do not term it a healthy
situation to fill the gap of current deficit from capital receipts). Foreign
inflows like FDI and FII’s investments have been funding around $ 50bn for last
six years (except 2008).
My Point of Concerns: CAD, GDP Growth and Stubborn
Inflation
A few
days ago, one of my old industry friend was discussing with me the positive signs
of our economy and their so called positive effects on the Equity and Debt
market emphasizing primarily on CAD coming down from 4.8% to 3.6% and I really
wanted to make him a part of my negative economic indicators but his sheer
loyalty towards our economy and positive thinking stopped me from doing so.
As the
improvement in trade balance in 4Q was known, the QoQ decline in the CAD as a
percentage of GDP was not a surprise. My point of concern is decline in
invisibles.
Invisibles
declined by 8% YOY in Mar.13, the second consecutive quarter of negative
growth.
Worryingly,
each major part of the invisibles set showed concerning trends:
1. Investment
Income ( i.e. money sent back by MNc’s plus interest payments on bonds) has
stayed near record high levels around US$5bn/quarter
2. Income
from software services remained barely positive( +1% YoY)
3. Remittances
reported a second consecutive quarter of YoY decline.
While
further dissecting the Reasons behind CAD falls, what I found was that
interestingly 4Q13 was only the second quarter since 2001 (barring the crisis)
when import fell YoY but unfortunately, this was accompanied by a fall in
export as well.
For me, India’s
vulnerability looks serious: the second highest current account deficit in the
world after US funded by short term capital receipts, with reserve accumulation
stopped since 2008.
My other
point of worry is the over-dependency on short loans in the form of short term
credit to India. In the current year $ 165bn will be the amount come up for
redemption or refinancing.
One of
my greatest concerns towards Growth- inflation puzzle is that while the GDP
growth has slowed down from 9% in FY11 to decade low of 5% in FY13, the
inflation has just decelerated from 9.5% to 7.5% against the basic theories of
economy.
At the
peak of the investment boom in 2007, private corporate as well as Government
announced around Rs. 5 Trillion of new projects every quarter and now it has
come down to a striking figure of Rs. .67 trillion.
It
compels me to support the RBI contention and its worry over the pattern of
current inflation that the problem is from supply side rather than from demand
side.
To add to
my worry is that when my central bank will realize it completely that rate cuts
will not help in such a case, I am afraid about the future of bond yields!!!!
This is
nothing but postponing the D- Day. Rather than taking aggressive measures for
strengthening of overall economy, we are just carrying forward the deep impact
to some future days.
My View:
I still
believe CAD to settle down between 4-4.5% by Mar.2014.
Are we heading to Solvency crisis?
However,
though India’s indebtedness is rising, external debt to GDP is not at that
level that can cause a solvency crisis (21% of GDP) like some of European
countries. Even percentage of foreign currency reserves to external debt (144%
of reserves) is higher in the decade but much lower what it used to be in
1990s.
So, from
my point of view – the solvency crisis is out of question. (It proves that I do
not mention only negative indicators of our economy – allegation I face
sometimes)
The Infamous “Taper”:
The
Employment report of US dated 5th July 2013 was not at all bad. On
the basis of prevailing economic conditions, I think , they would be needing
somewhere 250000 jobs a month and at this rate, to achieve the level before the
recession, it will take around five years and unfortunately without a clear
shot, I fear full recovery might not happen at all.
Monetary
policies might do the trick but suddenly rather than becoming more aggressive
the Fed has started talking about the infamous “Tapering”
Sometimes,
I feel that the talk about “Taper” has done more damage than perhaps the
“Taper” itself would have done.
I
strongly believe that aggressive monetary measures may finally get the US back
to full employment and wish the same as I recall tha last time they were in the
same situation what happened was…………..
“WORLD
WAR II”
My View:
Only if
I could, I would have recommended a jobless rate threshold of 5.5% instead of
6.5% to Fed.
Anyway,
as I believe that the reduction in the bond buying program or “taper” is more
of monetary policy measure open for flexibility rather than a strategic move.
I AM OF
THE VIEW THAT sooner or later the Fed will realize the current importance of
lowering of job threshold rather than bowing in front of conventional monetary
governing theories.
I see
tapering is out of question in near future……. (Another positive talk from my
side!!!!!)
Rupee Slide:
In
june.13, the rupee dropped to an all time low of 59.7 per dollar and sliding
continuously. A sharper than expected trade deficit ( due to surge in gold
imports) triggered the then fall in rupee and the domestic currency further weakened
after uncertainly regarding the early pull back of QE3 by US Fed. In June.13 FII
pulled out $5.4 bn from Debt market and $1.8 bn from equity market.
Even in
the recent past, shocks of smaller magnitude have been sending the rupee into a
tailspin. The recent capital flight was in response to a common shock across
all the emerging economies. Brazil, Indonesia, Turkey, Korea, Russia, Philippines
and South Africa saw their currencies weaken by 5-17 percent. Among these, the
South African Rand, Brazilian Real and Russian Rouble depreciated the most as
these economies have a high current account deficit and rely heavily on foreign
funding.
The
increasing vulnerability of India’s external account impairs the rupee’s ability
to counter even smaller shocks. With limited intervention from the RBI, the
value of the rupee against US dollar is almost entirely influenced by demand
and supply conditions.
Have a
look on the four episodes of rupee depreciation in the past decade:
1. Aug.08
to Mar.09: Lehman Crisis- Very Big shock-Low vulnerability
After
the Lehman crisis, the rupee registered a sharp fall against the dollar due to
net FII outflows of US$6.7bn during Aug.08 to Mar.09. The rupee fell to a new
low of 52.1 per dollar from 42 per dollar during this period.
2. Aug.11
to Dec.11: EU recession- Big Shock- Rising Vulnerability
In
Aug.11, the rupee began weakening subsequent to the news of double dip
recession in the euro zone. In Dec.11, the rupee fell by nearly 17% YoY and
reached a new low of 54.2 per dollar.
3. April.12
to June.12: Fear of Greek exiting from EU- Anticipated Shock- high Vulnerability
In
April.12, the rupee started weakening in response to news of Greece exit from Euro
zone. This Uncertainty caused the net FII inflow to fall to US$56 million. Moreover,
the fear of a global credit freeze resulted in preponement of dollar purchase by
India companies to service huge repayment scheduled during the fiscal. The
rupee fell to a new low of 57.2 per dollar in June.12 declining by 25% average
YoY.
4. May.13
to July.13: “Taper Announcement”- small shock though high vulnerability
After
the Federal Reserve announced a gradual withdrawal of their bond purchase
program (popularly known as QE) in May end 2013. FII’s began pulling out funds
from debt markets of most of the emerging markets and caused turbulence in
rupee’s movement in spite of the fact that this shock was of much low intensity
than the earlier one.
My
point is that the rising vulnerability of India’s external account is
influencing currency exchange rates to the extent that speculations (or we can
say smaller shocks) have become a bigger trigger than a dramatic change in the
fundamentals itself.
My View:
I
believe this depression to be a very short lived situation and expect the
currency to come up at a level of Rs. 55 per dollar by Mar.14 though volatility
will still be an inherent feature.
At Last: by the time I have ended writing
this blog, RBI has already taken the aggressive measure to control rupee slide
and thus, I will try to deliver my next blog on the same very soon.