Recently, the rupee hit its four-month low and recovered. It has been quite volatile for the whole FY12 and has depreciated almost 14% in last one year. The movement has been mainly on account of fundamental issues like the fragile global growth and weak Indian macro economic factors.
Besides this, issues like the growing strength of the other currencies due to a lower rate regime are weighing heavy on the rupee movement. On domestic front, the widening current account and fiscal deficit, policy paralysis, slower economic growth amid rising inflation and lower expectations of further rate cuts as well uncertainty in capital flows (the FII’s have sold Rs 1,657 crore in April after they invested Rs 39,375 crore since January) are likely to pressurise the rupee in the medium-term.
India’s current account deficit (CAD) widened to the highest ever in a quarterly figure of US$19.4 billion (4.3% of GDP) in Q3FY12. During April – December FY12, the CAD surged to US$53.6 billion as against US$39 billion during the previous corresponding period. The CAD is likely to remain high in the next two quarters due to the slowing down of exports, while imports would be firm due to high oil prices.
Also, India’s trade deficit touched an all-time high of $185 billion as export growth remained muted and imports soared. While inflation concerns are far from mitigated, overall inflation is unlikely to come close to the Reserve Bank of India’s (RBI's) comfort zone (4 – 5%) in FY13. We see the WPI inflation at ~8% for most of FY13. This in turn limits RBI’s window to reduce rates further. Lately, the S&P has added to the woes by downgrading India’s outlook to negative from the stable, reflecting these macro issues.
Hence, these macro-economic factors are likely to keep the rupee under pressure for some more time. Accordingly, we expect the rupee to depreciate to 54, or also 55 - 56 levels, by October 2012.
On the other hand, the rupee movement is expected to benefit the export-oriented companies like textiles (this is because of the rupee differential as Indian rupee is depreciating and Chinese currency is pegged this will help the exporters like ARVIND, RAYMOND and BOMBAYDYEING) information technology (Wipro, TCS), and some pharmaceutical companies (Glenmark, IPCA).
However, the imports have become costlier, which in turn, is hurting our economy badly. Sectors like oil marketing (OMCs), airlines and some capital goods companies as well have been negatively impacted.
RBI intervention
The RBI and the government had initiated an array of measures to stem the rapid INR depreciation. The thrust of those measures had been to reduce speculative positions on the currency, attract more overseas deposits, policy initiatives and create easier access to foreign capital.
However, the RBI’s initiative is very much limited. The latest data shows that India’s dollar reserves at the lowest in the last two months due to large-scale dollar selling by the central bank to stem the rupee’s fall. It’s difficult for the RBI to defend the rupee aggressively from depreciating due to its declining forex reserves.
We feel the H2FY13 may see some improvement, rather a slow improvement, where rupee will start appreciating slowly around 50 levels by March FY13. This may only happen if the investment cycle picks up. On the other hand, we expect India’s gold imports in FY13 to lower compared to FY12. This may be possible mainly due to the duties imposed by the government. Gold imports were nearly $59 billion in FY12, which is expected to decrease significantly in FY13.
Also the oil prices would be keenly watched. We expect the crude to hover around these levels as demand has softened comparatively from Euro zone, China and Japan and supply is stable. Also the geopolitical risk regarding the Iran sanctions is a key risk to the prices.
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The author is Senior Vice President (Equity Research), Anand Rathi
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