INR - Up or Down from here??


I have tried to put my views on Indian Rupee on two occasions before this one. For reference,I am putting the links to those discussions below along with the dates. 


INR headed to 50 - 25th Jan 2011

USD-INR Technical Perspective - 12th October 2011

I will use the second of these discussions as my starting point here.
For those who had tightened the belt, the rupee depreciation spree was not a surprise.We have not reached orbit yet, we have only taken off. 
Now whether this take off has enough to propel it to orbit or whether we are heading back to the ten year range is the moot question. Well I do not have the answer, but maybe we can put the probable drivers of the movement in future and try and make an educated guess. 


I will finish off first with my sense of the chartical position right now. What has essentially happened is that INR has broken into a new life time high by crossing the previous high of 52.18 which was set in March 2009. It crossed it with a lot of vigour. Having set quite a few heart beats racing, interventions did come in the form of actual dollar selling by RBI and severe restrictions on market participants (desperate measures, I thought).So broadly what is happening right now is that INR is taking a breather. 


Having made a new life time high, it is basically testing the previous high (this is classical pattern for charts making new highs, particularly life time highs) and as of now has not broken it. As long INR does not start trading below 52 and sustain there, I think its fair to assume that this is a breather and we are getting set for the next round of depreciation after some time.


But how do we decide that it is a breather and that INR will not relapse back to the previous 10 year range.As I said before I do not have an answer for that, but I will put up some drivers for the INR which can drive it below 52 and others which can drive further above 52.


DRIVERS BELOW 52:


- FIIs come in hordes into the stock market, which will probably require global situation to improve.
- Gold imports drop off dramatically (that is responsible for a big chunk of the current account deficit). Possible with the high prices of gold. How about gold exports?? I suspect that may happen if gold prices start dropping alarmingly in INR terms.
- Deluge of money comes in response to the hike in interest rates on foreign currency deposits.
- Crude oil cools off dramatically.
- Finally, Government does some sensible work.


DRIVERS ABOVE 52:


- FIIs pull out money big time. They have hardly sold in the Indian markets as of now.
- Crude oil marches upwards even further.
- Gold imports keep coming.
- Exports crash. First signs were visible last month and lets wait for the follow-up.
- Close to 80 bn USD of short term up for rollover in the next one year.Maybe 15-20 bn USD may not get refinanced.
- Government continues with the screw-up job.


What RBI has done off late is essentially a time-buying manoeuvre. That is not going to solve the basic problem. And it hopes that within whatever time it has bought with these moves, either situation improves globally or at least government starts the process of clearing up the mess.


There are quite a few parameters which can have a dramatic impact on the way the INR moves going ahead. And most of them are inter-connected as well.


So its a tough call.
With a gun on my head, I will put the odds in favour of INR depreciating further in 2012.


(As always, let me make it clear that I am no currency expert. Take these to be the opinions of an amateur currency analyst!!)

Will India export gold??


When India is the largest importer of gold, the title seems out of place. But with gold prices are where they are, is there a possibility that we will start thinking of exports?


Lot of analysis has gone into the effect of gold imports on the trade deficit that India has. Looking at that people have suggested that trade deficit is overstated to the extent that gold is not re-exported in the form gems and jewellery. My rough estimate is that the effect maybe roughly 40 bn USD. That is a big chunk of the trade deficit of around 150-160 bn USD.


People have argued that since gold is more an investment than a consumable, markets (particularly currency market) do not seem to be appreciating the value of the gold that Indians hold, which is estimated to be around 18000 tonnes.


Is the market really discounting such a big storage of gold? And if yes, why?
Generally markets are smarter than all of us put together. So, as of now, I will taking the safer option of being on the market's side.
I will try and reason, why the value of the gold in India is not exactly being appreciated and why currency markets are weakening the rupee when we are the biggest holders of gold globally?


First a little bit of history. Have a look at the following chart. This is gold prices in INR terms over the last 38 years.



Source : Bloomberg


Gold started at somewhere around 520 Rs per ounce (please use the relevant conversion numbers for per tola comparison) in 1973 and today quotes around 90000 Rs per ounce. That roughly corresponds to a return of around 14.3% CAGR over a period of 38 years. That is an astounding number!!!


And this happened when through the 1980s and 1990s, gold was in a severe bear market in practically all other major currencies!!
The major reason for this mind-boggling performance in INR terms is that India has been fiscally profligate country all through out.In fact it was only after 1997 that RBI stopped monetising government deficits.Thus all through out this period INR depreciated against all major currencies. Gold has stood out as a fantastic store of value for Indians as 14.3% CAGR will at least compensate for inflation over the time frame if not do slightly better.That being the case, it should not be surprising that Indians have kept buying gold in the face of ever rising prices.They have experienced that it sustains purchasing power over a period of time and use it as shield against the fiscal attacks that government mounts on them every year.


Looking at the present scenario,it is safe to assume fiscal prudence is not on the radar of the government right now.And as long as that continues, a combination of gold prices in USD and USD-INR conversion ratio will probably continue the mind-boggling performance of gold in INR terms.And it is more likely that Indians will keep importing gold, forget exporting it.


And if ever high gold prices were to attract selling by Indians, it should have happened at least to some extent in the last few years or today. But there are no signs of that yet. We are still importing and in large quantities.


Given the likelihood of gold imports continuing, I think markets are correct in discounting the presence of gold in India.
You do not value the home where you stay, since you never intend to sell it!!