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INDIA FOREX ADVISORS RESEARCH | CURRENCY INDIAN MACRO ECONOMICS Rupee may hit 60 by June 2013
Rupee may hit 60 by June 2013
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INDIA FOREX ADVISORS RESEARCH | CURRENCY INDIAN MACRO ECONOMICS
Rupee may hit 60 by June 2013
Table of Contents
1. Executive Summary……….……………………………………………3-4 2. Pace of the Rupee………….………...………………………………………… 5-6
3. Domestic factors affecting the Rupee…….......................................... 7-12
4. International factors affecting the Rupee …..………………………13-17
5. Risk aversion ………………………………..................................................18-23
6. RBI’s stance on the depreciating Rupee…………….…………........23-25
7. Black Swan events……………………………………………….……………26-27
IFA Research Team
Amit Pabari
Anita Joshi
Manpreet Kaur Doad
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Major Domestic Triggers:
CURRENT ACCOUNT DEFICIT & FISCAL DEFICIT
WEAK IIP & HIGH INTEREST RATES
INSUFFICIENT OF FDI AND FII FLOWS
REGULATORY & POLICY PARALYSIS IN GOVERNMENT
POSSIBILITY OF RATING DOWNGRADE
UNCONTROLLABLE INFLATION
FALLING GDP GROWTH
SHORT TERM DEBT MATURITY OF $ 147 BILLION BY
MAR- 2013.
Executive Summary: Indian Rupee is entering A New Normal Forex Rate
Need some Heading
Major International Triggers:
EUROPEAN CRISIS – HITTING EMERGING MARKET
FLOWS
SLOWDOWN IN CHINA – HITTING COMMODITY DRIVEN
MARKETS
STRONG DOLLAR INDEX DUE TO RISK AVERSION
STIMULUS MEASURES OF CENTRAL BANK LOSING ITS
IMPORTANCE
MONEY FLOWING ACROSS SAFER AND LIQUID BONDS
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RBI’S STANCE: RBI’s Intervention: Introducing policy measures rather than aggressively selling US dollars.
RBI’s Focus: Curbing periodic volatility rather than controlling the exchange rate.
RBI’s Priority: Controlling inflation on a priority, even if it means sacrificing growth.
OVERALL OUTLOOK:
Overall, USD/INR displays a bullish trend: We estimate USD/INR to likely continue this trend in FY2013 and target a 58-60 level. We expect the worst case USD/INR pair to make a base around 52.10 levels in the next one year.
Indian GDP: We expect India’s GDP to likely to slow down further to around 6% and below.
Emerging Markets: India will likely remain an Underperformer across all Emerging Markets.
Dollar index and Gold: We expect the Dollar index to remain bullish with our target of 87-89 levels. Gold appears Overbought and may hit $1435. Industrial commodities will likely remain weak.
International Currencies: We believe international currencies to remain weak with the Euro having a target of 1.16, GBP 1.50, Yen 85 and the Australian Dollar Parity.
US 10-year Treasury yield: We estimate yield should witness 1.20% in FY2013.
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PACE OF USD/INR – UNCONVENTIONAL MOVEMENTS SINCE THE 90S AND WILL BE THERE IN THE FUTURE
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Chart Start Date Closing Value End Date Closing Value No of Days Movement
A 1-Jan-95 31.38 5-Feb-96 37.9 254 Depreciated by 17.20%
B 13-Aug-97 35.78 19-Aug-98 43.10 223 Depreciated by 16.98 %
C 6-Aug-02 48.90 31-Mar-04 43.60 401 Appreciated by 10.84%
D 9-Aug-04 46.18 31-Dec-04 43.46 102 Appreciated by 5.89%
E 2-Aug-06 46.63 24-Dec-07 39.28 324 Appreciated by 15.77 %
F 7-Jan-08 39.26 2-Mar-09 51.97 279 Depreciated by 24.45%
G 26-Jul-11 44.07 22-Jun-12 57.12 249 Depreciated by 22.86%
Legend: The rows A, B, F and G show the steep trend of depreciation in the rupee, while rows C, D and E show the appreciating trend in the rupee.
It is clearly evident that the pace of depreciation has been much steeper than the pace of appreciation since 1995; hence we feel that the
pressure of depreciation may continue over the next 1-2 years in an erratic manner even as we see a period of appreciation for a longer-
than-expected time. The above chart depicts the major moves (appreciation and depreciation) of the USD/INR from 1996 onwards.
The rupee is seen weakening over a period of time against the dollar. It is observed that the pace of depreciation has been faster than that
of appreciation. Though the appreciation has taken more time, the percentage change has been lower than the percentage of
depreciation.
As seen in the above table, row A indicates that the rupee took 254 days to depreciate by more than 17% whereas row C indicates it has
taken more than 400 days to appreciate by a mere 10%. A similar situation is seen between rows E and F, where the rupee has taken more
than 300 days to appreciate by 15% while on the other hand, it has depreciated by more than 24.45% in 279 days.
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LOCAL INDICATORS– SLOWING GDP GROWTH
LOCAL FACTORS -GDP
Source: Trading Economics, IFA Research *Rupee Yearly Average taken / GDP Year End Rate
Trend:
India’s GDP growth has declined to 6.1%
in the year 2011, which was the slowest
since 2003. Generally, when the growth
deteriorates, it impacts Rupee
movement adversely.
Outlook:
The growth in the coming quarters is
likely to be around 6% or below on
account of the global slowdown and a
delay in policy action on the part of
the Government.
Triggers:
Declining IIP due to high interest rates
Reduced capital formation
Widening fiscal deficit crowding out private
investments.
4.5
6.7
1.6
11.8
5.5
9.7 9.4 9.7
6.17.3
8.3
6.1 6.5
44.9647.18 48.59
46.54 45.29 44.11 45.341.31
43.39
48.3645.85 46.82
52.52
0
2
4
6
8
10
12
14
0
10
20
30
40
50
60
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 (Est)
USD/
INR
GDP
%
GDP USD/INR
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LOCAL INDICATORS – WIDENING CURRENT ACCOUNT DEFICIT
Source: Trading Economics, IFA Research *Rupee Yearly Average taken/ CAD Year End
-4.5
1.47.1 8.8
0.8
-10.3-9.5
-11.3
-29.0
-21.1
-51.8-56.0
44.9647.18 48.59 46.54
45.29 44.11 45.3
41.31
43.39
48.3645.85 46.82
52.52
0
10
20
30
40
50
60
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
-60.0
-50.0
-40.0
-30.0
-20.0
-10.0
0.0
10.0
20.0
CAD
($ B
ILLI
ON
)
USD/
INR
CAD (Billion $) USD/INR
Trend:
The current account deficit (CAD) has
widened drastically and it accounts for
more than 4% of the GDP (the lack of
FII inflows and FDI is putting further
pressure on CAD).
Outlook:
The CAD is likely to improve in the coming
months owing to reduced imports in gold and
other semi precious stones and pearls. If there
is a heightened risk of rising crude prices again
due to tensions between the US and Iran
escalating in late 2012-13, then we could see
further pressure on CAD.
Triggers:
Inelastic demand for crude and
heavy demand for precious metals,
pearls and semi precious stones.
Slowing exports and increasing
imports.
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LOCAL INDICATORS – FISCAL DEFICIT CONTINUES TO REMAIN HIGH
Source: Trading Economics, IFA Research * Rupee Yearly Average taken/ FD Year End
Trend:
Fiscal deficit has been consistently
holding above 5% due to increased
Government expenditure owing to
the high subsidies for petroleum and
agriculture products.
Outlook:
Fiscal deficit will continue to remain high due to
populist policies of the Government prior to the
General Elections, 2014. We could see some
respite due to some key public sector
undertakings (PSUs) opting for healthy
disinvestment.
Triggers:
Higher subsidy bills
Policy Paralysis
Lower tax collections
Failure of the Government to meet
its disinvestment targets.
-3.9 -4.4-4.7
-3.5-3.3 -3.3 -3.5 -3.1
-7.8
-6.9
-5.1-4.6
-5.1
44.9647.18 48.59 46.54
45.29 44.11 45.341.31
43.39
48.3645.85 46.82
52.52
0
10
20
30
40
50
60
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
-9.0
-8.0
-7.0
-6.0
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
Fisc
al D
efic
it %
of G
DP
USD
/ IN
R
Fiscal Deficit % of GDP USD/INR
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LOCAL INDICATORS – IIP HIT BY HIGH INTEREST RATES
Trend:
Industrial production, which accounts
for 27% of GDP, has contracted
sharply since 2009.Sluggishness in the
industrial index of production is
clearly visible due to high interest
rates.
Outlook:
The slowdown in industrial output will persist
further if there are no signs of interest rate
cuts; if there is no active policy action by the
Government on FDI; and if there is no revival
of the infrastructure segment.
Triggers:
High interest rates
Slowing investment activity due to
loss of confidence relating to
Government policies.
Slowdown in global demand
Source: Trading Economics, IFA Research *Rupee Yearly Average taken/ IIP figure Year End
3.5 3
6.27.4
8.9
5.7
13.7 13.5
-1.6
9.5
8.12.5
-1.8
44.9647.18 48.59 46.54
45.29 44.11 45.341.31
43.39
48.3645.85 46.82
52.52
0
10
20
30
40
50
60
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Jun-12
-4
-2
0
2
4
6
8
10
12
14
16
IIP (%
)
USD
INR
IIP USD/INR
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LOCAL INDICATORS –WPI ON A RISING TREND
Trend:
There is an increasing trend in WPI
despite a series of interest rate cuts
by the RBI. This is due to supply side
factors contributing to food inflation,
low interest rates and repeated
liquidity injections from industrial
nations.
Outlook:
WPI may not come down drastically unless
interest rates are reduced due to poor
monsoon / rain deficit & increasing oil
prices.
Triggers:
Rising food inflation due to supply side
factors
Repeated liquidity injections from
industrial nations
High prices of imported goods like iron &
steel, chemicals & precious stones.
4.38
6.96
4.01
6.68 7.15
9.45
7.74 7.25
44.11 45.3
41.3143.39
48.3645.85 46.82
52.52
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
10.00
0
10
20
30
40
50
60
2005 2006 2007 2008 2009 2010 2011 Jun-12
WPI
(%)
USD/
INR
WPI USD/INR
Source: Trading Economics, IFA Research *Rupee Yearly Average taken/ WPI figure Year End
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LOCAL INDICATORS – BALANCE OF PAYMENTS TREND PEGGED TO FII-FDI INFLOWS
Source: CEIC, IFA Research *Rupee Yearly Average taken/BOP March End
6,174
11,951
17,185
30,819
25,552
15,568
35,638
90,848
-20,519
13,453 16,044
-10,400
47.18 48.5946.54
45.29
44.11 45.3
41.3143.39
48.3645.85 46.82
52.52
0
10
20
30
40
50
60
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
-40,000
-20,000
0
20,000
40,000
60,000
80,000
100,000
BOP
USD/
INR
BOP USD/INR
Trend:
BOPs trend is totally dependent on FIIs
and FDI flows into the country.
Outlook:
Can improve ahead provided the
Government implements policies with
an objective to attract foreign capital.
Triggers:
•High current account deficit and declining
capital inflows.
•Reduction of flows from European countries
and banks.
•Declining ROI for FIIs and other investors to a
depreciating rupee.
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INTERNATIONAL INDICATORS – US TREASURY YIELD HAS AN INVERSE RELATION WITH THE INR
Source: Trading Economics, IFA Research *Rupee & US Yield Yearly Average taken
44.96
47.18 48.5946.54 45.29 44.11 45.3
41.3143.39
48.3645.85 46.82
52.526.02
5.004.59
4.004.26 4.28
4.794.63
3.643.24
3.202.76
1.88
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
0
10
20
30
40
50
60
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
US Tr
easu
ry Y
ield
USD/
INR
USD/INR US TREASURY YIELD
Trend:
The 10-year US treasury yield shares
an inverse relationship with the rupee.
Recently, yields have been falling to
their all-time low of 1.38%. (All-time
low since 1912)
Outlook:
The 10 year US treasury yields seem to
remain below 2% and may be heading
towards 1.0%-1.2% on continued
nervousness or the occurrence of any Black
Swan events.
Triggers:
•Global risk aversion.
•Investors seeking safer and liquid assets.
•Reduction of other liquid and credible
Sovereign bonds.
Downgrading of Euro Zone Countries
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INTERNATIONAL INDICATORS – A STRONG DOLLAR LEADS TO RUPEE WOES
Source: Trading Economics, IFA Research *Rupee & DI Yearly Average taken
44.96
47.18 48.59
46.5445.29
44.1145.3
41.31
43.39
48.36
45.8546.82
52.52
109.43
115.18 111.2895.92
87.57 87.08 86.3880.77
77.05 80.8 81.3376.68
84
30
50
70
90
110
130
30
35
40
45
50
55
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Jun-12
DOLL
AR IN
DEX
USD/
INR
USD/INR DOLLAR INDEX
Trend:
The Indian rupee shares an
inverse relationship with the
Dollar index. The strength in the
Dollar index has added to rupee
woes recently.
Outlook:
The Dollar Index appears to be bottoming out near 72.69 levels and is poised for a possible up-move in 2012-
2013.
Triggers:
Global slowdown and the rush for dollar assets.
Economic woes in Europe and EMs.
A healing US economy.
Low chances of QE on account of its diminishing
returns and upcoming US elections.
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INTERNATIONAL INDICATORS– CENTRAL BANKS RESORT TO QE TO AVERT A FINANCIAL CRISIS
6.00%
17%
7%
22%19.00%
32%
22%
31%
Federal Reserve European Central Bank Bank of England Bank of Japan
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
2007 % of GDP
2011 % of GDP
Trend:
There has been a continuous
increase in QE over various
economies creating an easy
flow of money and inflation
across various emerging
markets and asset classes.
Outlook:
We expect further QE from the ECB,
BoE and possibly from the FED but
its importance is decreasing every
day since a larger share of money is
kept as bank reserves and bond
yields have already hit all-time lows.
Triggers:
Slowdown of growth in US, Europe and UK.
Increased liquidity crisis in financial markets
Continuous buying of bonds to keep interest rates low.
Source: IMF, IFA Research
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INTERNATIONAL INDICATORS – INR CLOCKS HIGHEST % CHANGE AMONGST KEY ASIAN CURRENCIES
Source: Trading Economics, IFA Research *% change from 1st August 2011- 31st July 2012
-20.82
-10.43
-7.71 -6.08 -5.74
-3.93-3.51
0.47
-0.85
1.13
-25
-20
-15
-10
-5
0
5
10
Rupee Indonesia Rupiah
Korean Won
Malaysian Ringgit
Thai Baht Taiwan Dollar
Singapore Dollar
Hong Kong Dollar
Japanese Yen
Chinese Yuan
% Change in Asian Currencies
Trend:
The Indian rupee has registered
the highest percentage change
among all major Asian currencies.
It has depreciated by almost 24%
in the last one year.
Outlook:
We expect the Rupee to be weaker in relative
terms v/s all other Asian currencies. We are
also seeing an active divergence of FII and FDI
funds to other Asian economies due to poor
macroeconomic fundamentals and a delay in
policy reforms.
Triggers:
Poor local fundamentals
Lack of flows due to risk aversion
High inflation rate among Asian nations.
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INTERNATIONAL INDICATORS – EMERGING MARKETS GROWTH APPEARS TO FALTER
Trend:
The Emerging Nations’ growth
seems to falter again,
collectively forming a double-
dip kind of a pattern.
Outlook:
The trend seems to continue into
2012-2013 on account of an overall
slowdown in developing nation’s
growth — the main losers being
Russia, Mexico, Turkey & Brazil.
Triggers:
• Dip in demand from developed markets such as the US,
Europe & UK.
• Pulling back of cheap liquidity from European nations.
• Dip in overall commodity prices reducing their export
earnings.
Source: Trading Economics CEIC, IFA Research
-10
-5
0
5
10
15
20
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 (E)
GDP (
%)
CHINA INDONESIA KOREA RUSSIA TURKEY BRAZIL INDIA MEXICO
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RISK AVERSION – GOLD & THE DOLLAR INDEX SHARE AN INVERSE RELATIONSHIP
Source: Trading Economics, IFA Research * DI Yearly Average, Gold Year End
109.43115.18 111.28
95.9287.57 87.08 86.38
80.77 77.05 80.8 81.33
76.6874.68
84
274 279 348 416 438519
638838 889
1097
1421
1567
1920
1597
0
500
1000
1500
2000
2500
0
20
40
60
80
100
120
140
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Sep-11 Jun-12
GO
LD
DO
LLA
R IN
DEX
DOLLAR INDEX GOLD
Trend:
The Dollar index has maintained a downward trend since year 2000,
making a bottom in May 2011 at 72.69 while Gold has been
consistently rising in the same period topping at US$1,920. Since then
both the trends have reversed respectively.
Implications:
It shows that investors’ preferences are shifting from Gold to
the US Dollar due to the overbought nature of the precious
metal.
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RISK AVERSION – USD/CHF & USD/JPY — INVESTORS SEEK SAFER ASSETS
Trend:
Trend of both the pairs have
been consistently falling due to
increased investments in this
currency pair based on its ‘safe
haven’ status.
Outlook:
The trend is likely to be range-bound with possible
upside in the pair due to increasing debt problems in
Japan and banking issues in Switzerland. Both the
countries’ Central banks are aggressively intervening
(cap of 1.20 for EUR/CHF and 76 for USD/JPY) to
protect their respective exports.
Triggers:
• Global risk aversion.
• Investors seeking safer and liquid
assets.
• Reduction of other liquid and credible
instruments.
Source: Trading Economics, IFA Research *CHF & JPY Yearly Average taken
1.2461 1.25281.1998
1.0826 1.08531.0362
0.89620.977
110.16 116.32 117.76
103.35
93.5887.72
79.68 78.46
60.00
70.00
80.00
90.00
100.00
110.00
120.00
130.00
0
0.2
0.4
0.6
0.8
1
1.2
1.4
2005 2006 2007 2008 2009 2010 2011 Jul-12
USD/
JPY
USD/
CHF
USDCHF USDJPY
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RISK AVERSION – TREASURY YIELD OF VARIOUS ECONOMIES BEARISH
Trend:
The trend has been consistently
falling since 2007, making new
lows in 2012 due to increased
investor preferences in the
above Sovereign bonds.
Outlook:
The trend of the above bond yields remains bearish
due to investors seeking a return of their
investments rather than returns on their
investments.
Triggers:
• Global risk aversion.
• Investors seeking safer and liquid
assets.
• Reduction of other liquid and credible
Sovereign bonds.
Source: CEIC, IFA Research
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RISK AVERSION – USD/INR & SENSEX TO CONTINUE THEIR INVERSE RELATIONSHIP
Trend:
The trend of the Rupee since 1997
has been consistently weak. Only
during the period 2003-2008, we
have seen an appreciating trend
due to continuous inflows across
all Emerging Markets.
Outlook:
Since we have seen increased risk aversion across
the globe and slowdown of growth in Emerging
Markets, we would continue to see a depreciating
trend for the rupee ahead.
Triggers:
• Low interest rates post 2005 in the US.
• Increased risk appetite
• Active carry trade from Japan and US.
Source: Trading Economics, IFA Research *Sensex & Rupee Year End Rate
39.2142.49 43.51
46.59 48.2 47.9445.45
43.3245.02 44.25
39.38
48.58 46.444.7 53.06
55.64
3659
3055
5006
3,972
3,262
3,377
5,839
6,603
9,398
13,787
20,287
9,647
17,465
20,509
15,455
17,236
0
5000
10000
15000
20000
25000
0
10
20
30
40
50
60
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Jul-12
SENS
EX
USD/
INR
USDINR Sensex
Risk Appetite
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RBI’S STANCE – PURCHASE & SALE OF DOLLARS — A DOWNWARD TREND SEEN
Trend:
Consistent downward trend
seen in RBI’s intervention
during the last few years.
Outlook:
The RBI would not like to sell dollars due to the
country’s unhealthy reserves position and
aggressive buying will also not take place due to lack
of robust inflows and the high cost of infusing
liquidity.
Triggers:
• The Central Bank wants the market
forces to determine the true value of
the exchange rate
• The main objective is to curb market
volatility rather than to control the
exchange rate.
Source: RBI, IFA Research
29.37
48.93
36.41
15.4820.59
74.88
45.90
6.492.45 0.00
3.09
15.39
22.5216.53
7.10
0.00 0.00
57.31
12.31
0.76
12.52 11.53
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Jun-12
0.00
10.00
20.00
30.00
40.00
50.00
60.00
70.00
80.00
$Bill
iom
PURCHASE SALE
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Rupee may hit 60 by June 2013
RBI’S STANCE – FX RESERVES & IMPORT COVER CONSISTENTLY DECLINING
Trend:
We have seen a consistent
decline in the reserves to
import cover ratio from 2010-
2012, indicating pressure on
the current account deficit
(CAD).
Outlook:
We do not expect to see any significant
improvement in the import cover ratio until we see
significant FII inflows in the coming days.
Triggers:
• Increased imports
• Inconsistent FII and FDI flows
• Revaluation of FX reserves due to the
dollar.
Source: RBI, IFA Research *Rupee Yearly Average taken
42 54 75113
142 152199
310
252279
305 294
8.8
11.5
14
16.9
14.3
11.612.5
14.4
9.811.1
9.6
7.2
0
50
100
150
200
250
300
350
0
2
4
6
8
10
12
14
16
18
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
FORE
X RE
SERV
ES
IMPO
RT C
OVE
R
FOREX RESERVE ($ Bn) IMPORT COVER
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Rupee may hit 60 by June 2013
BLACK SWAN EVENTS
We expect the possibility of some Black Swan events emerging in FY2013, which could strongly boost the US Dollar in that year.
US dollar index to head towards 90 in FY2013: The USD already seems to have bottomed in 2011 near 73 levels. High risk aversion
and positive economic numbers compared with its peer countries may push the US economy to stronger levels. The Dollar index above
85 levels could push the rupee close to 57-58 levels.
US-Iran war: US-Iran relations are strained over a variety of issues including Iran's backing of terrorist groups and its nuclear activities.
Any kind of warlike speculation may push oil prices above USD120/barrel, which may hit all economies especially oil importing
economies such as India, drastically. The Arab spring is already prevalent in Tunisia, Egypt and Libya which is making security situations
unstable with the US and Iran areas.
We have recently seen China’s growth falling to a 3-year low: China’s surging real estate sector, buoyed by a flood of speculative
capital is preparing itself for a larger-than-expected investment bust. There are indications of credit excesses, which may lead to a
bubble kind of situation likely occurring in 2013. We have already seen some of the biggest real estate companies posting lower growth
in 2012. Any such major public announcements may lead to a liquidity crisis, which may spread across Emerging Markets like India too.
India rating downgrade: The global rating agencies have already downgraded outlook for the Indian economy. We feel that there
could be a possibility of an actual downgrade due to poor monsoons, increasing CAD and delays in implementing Government policy
measures to reduce fiscal deficit. If such an event occurs, the cost of international dollar funding will go up for Indian banks and
companies, which will lead to a liquidity crisis and increased NPAs for banks. Companies will have to necessary buy US dollars from the
market to pay back their dollar liabilities which will create huge demand for the US dollar, making the rupee weaker.
The arab spring is already prevalent in Tunisia , Egypt and Libya which are making security situations unstable.
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Rupee may hit 60 by June 2013
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