Forex Eldorado

Foreign currency depositors could earn great returns if current trends continue

Why would anybody want to invest in rupee deposits if they could get an annualised return of 56 per cent on foreign currency deposits?

If the government had started the foreign currency deposit scheme for resident Indians three months ago, investors in UK pound deposits would have earned an annualised return of 56 per cent, investors in Euro deposits would have gained an annualised return of 48.6 per cent, while those who put their money in Australian dollar deposits would have earned an annualised return of 47 per cent.

That's because these currencies have appreciated dramatically against the rupee in the last few months. Here are the calculations:

We took the ICICI Bank foreign currency three-month deposit early bird offer and calculated how much you would have gained if you had invested the rupee equivalent of Australian $1,000 or 1,000 euro or 1,000 pound sterling on November 12, 2003.

ICICI Bank offers an interest rate of 6.3 per cent per annum on the Aussie dollar deposit, 4.8 per cent on the pound sterling and 3.05 per cent on the euro.

If you were putting in money in the Aussie dollar (AUD) deposit three months back, at the then AUD-rupee exchange rate of Rs 32.43990, you would be investing Rs 32,439.90.

Similarly, for a 1,000 euro deposit you would be investing Rs 52,176.10 at the rate of Rs 52.17610 and for the UK pound (GBP) deposit you would end up shelling out Rs 75,487.30 at the exchange rate of Rs 75.48730 on November 12, 2003.

At the end of three months, with the AUD-rupee exchange rate at Rs 35.70040, your investment maturity amount will stand at Rs 36,262.68.

Similarly, with the euro exchange rate touching Rs 58.07240, your maturity amount will be Rs 58,515.20 and at the rate of Rs 85.61010 three months hence, your GBP deposit will bear a maturity amount of Rs 86,637.42. (We have used inter-bank rates""-the real returns would be slightly lower)

These calculations are based on the movement of the currency three months back, and it's no guarantee of how the currencies will move in relation to the rupee in the future.

The big question, of course, is whether this trend will continue. Dealers point out that while the US dollar continues to weaken, the RBI is keen to slow the rupee's appreciation against the dollar.

On the other hand a currency such as the Australian dollar is linked to commodity prices which continue to go up. Also, interest rates have already been raised in Australia, strengthening the currency. So while a bet on a currency such as the Australian dollar may be worth a try, much depends on when the US decides to raise rates.

Steel sector capacity fears

Tata Steel is firming up plans to augment its production capacity from 4.5 million tonne per annum currently to 15 million tonne by 2010. They are not alone - JISCO is also planning a capacity expansion of 3.5 million tonne and SAIL one million tonne.

With the steel sector in the midst of a cyclical upturn, due to surging exports to China and rising domestic demand, companies are aiming to expand capacity aggressively to meet surging demand. Analysts are however, not sure of the long-term viability of such rapid expansion plans.

Chinese demand for steel is anticipated to grow from 257 million tonne in 2003 to 355 million tonne in 2007, largely due to Olympic-related construction activity. Chinese and international companies are responding to the anticipated surge in demand already.

India's exports to China are expected to reach 1.25 million tonne in FY04. Problems for the Indian steel industry could arise post 2007, as Olympic- related infrastructure spending in China is expected to level off.

This is expected to result in a drop in Chinese demand for imported steel from 37 million tonne in 2003 to 20 - 25 million tonne by 2008.

A potential drop in Chinese demand could spell the death knell to the frenzied capacity expansion taking place, as Indian suppliers may need to lower prices to remain competitive.

The concerns do not end there - with spot prices of HRC currently hovering at $ 420- 430 a tonne in international markets, analysts point out that it has become viable to reopen shut steel mills in Ukraine, Armenia and Kazakhstan.

With future exports growth uncertain, analysts are also questioning whether the domestic market would be able to absorb so much new capacity. Local consumption, currently at 27.5 mtpa, is anticipated to grow at 7 - 8 per cent. As a result, oversupply could become the key issue from 2008 -- as in early 2001 -- when HRC prices plunged to $180 a tonne.

With contributions by Arti Sharma and Amriteshwar Mathur.