Expert Zone

Straight from the Specialists

Making the most of a mini-crisis

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(Any opinions expressed here are those of the author and not of Thomson Reuters)

It all looked promising at the beginning of the year: the Indian rupee, like other Asia ex-Japan currencies, was appreciating against the dollar, to an extent on par with the Chinese yuan and just behind the Thai baht and Malaysian ringgit. Then came chatter in early May that the Federal Reserve was near gradually ending its money-printing program. The selloff in the rupee was rapid, and the currency lost more value than most of its Asian peers.

On Wednesday, Federal Reserve Chairman Ben Bernanke said the central bank will begin slowing the pace of its bond-buying stimulus later this year, triggering a global selloff that sent the rupee crashing to a record low on Thursday morning.

So how can the rupee recover? The quickest way is for the Reserve Bank of India (RBI) to use its dollar reserves to buy the rupee from the market, thereby stabilizing the currency. Some think the RBI can afford to do so because its foreign reserves are now equivalent to 15 percent of GDP, almost double the level in 1998. Then again, most other Asian countries have larger buffers, which renders the rupee more vulnerable than most of its Asian peers in case of future episodes of capital flight. In other words, supporting the rupee with reserves can only be short-lived and is a sure way of depleting India of international currency.

The key to solving the issue is reviving investment. One way to achieve this is for the RBI to cut interest rates further. It certainly has room to do so: both economic growth and the inflation rate are below 5 percent. Of course, the near-term casualty will be the rupee itself. Part of the currency’s attraction is the high interest rates in India than in the United States, so lower domestic rates would mean less attraction to buy the rupee, and a lower rupee would then mean higher inflation due to higher import costs. Already, the currency’s weakness has cancelled out the benefits of falling oil and gold prices in dollar terms. However, lower rates would stimulate investment in the real economy, as it would mean lower borrowing costs for companies.

Indian insurers can now go international

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(Any opinions expressed here are those of the author and not of Thomson Reuters)

Global insurers have been participating in the Indian insurance market for nearly 12 years. We may soon see the trend reversing.

The Insurance Regulatory and Development Authority (IRDA), the country’s insurance regulator, has laid down rules for Indian companies to start overseas operations. The criteria being: net worth of 5 billion rupees for life insurance companies, 2.5 billion rupees for general insurance companies and 7.5 billion rupees for re-insurance companies. In addition, the companies should have made a profit in at least three of the last five years.

Hard currency status a wishful dream for the rupee

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(Any opinions expressed here are those of the author and not of Thomson Reuters)

A hard currency is one that is globally accepted as an exchange currency for trade. It is also expected to remain less volatile in the short term and indicate long-term stability through its purchasing power. The perceived strength and confidence in a currency is also a function of its country’s political milieu, fiscal and trade balances, the policy of its central bank and future economic outlook.

Let us look at all these parameters in the context of the Indian rupee and see where it stands on its journey towards acceptance as a hard currency.

India Markets Weekahead – Volatility seen as RBI policy review in focus

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(Any opinions expressed here are those of the author and not of Thomson Reuters)

Volatility is here to stay and trying to predict the markets on a daily basis is a futile exercise. It’s no better than tossing a coin.

Monsoon rains are early and heavier then normal, raising the hopes of green shoots in the next few months. Macro numbers were showing signs of bottoming out but the rupee slide has thrown calculations awry. A feeble request by the finance minister urging people to shun gold won’t do much good in a country enamoured by gold.

Why the RBI should cut rates again

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(Any opinions expressed here are those of the author and not of Thomson Reuters)

In May, the Reserve Bank of India (RBI) had hesitatingly cut the repo rate by 0.25 percent, which made no impression on the stock market or commercial banks. That was because both expected the cut to be more substantial. But the RBI had not obliged.

Perhaps the monsoon, which arrived on the dot and is progressing satisfactorily, may make some difference to the RBI’s expectations of food inflation – which had been its principal reason for hesitancy. While it’s too early to predict monsoon behaviour for the rest of the season and the likely improvement in agricultural production, it does appear the improvement should be significant and inflation dampened perceptibly. Reduction in inflation, however, is not the only reason why the interest rate should have been cut.

The road to smart technology

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(Any opinions expressed here are those of the author and not of Thomson Reuters)

The Sixties witnessed the world’s first major technology wave with the rise of the mainframe, which had a dramatic impact on business processes and continues to do so even now. The second wave was the rise of the mini-computer, which had ease of use and was affordable. The third has been the PC, which needs no introduction, and the Internet is the fourth.

The Internet has changed the way business is conducted across the world and has had an impact on how we work, shop, socialise and interact. And now smart mobile technology really does look set to be the fifth major technology wave. What is of even greater interest is that we may be looking at a technology growing faster than any other in history. It took landlines nearly 100 years to reach saturation. Mobile technology reached saturation within 20 years and smartphones are set to do so in less than 10.

Will the rupee fall further?

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(Any opinions expressed here are those of the author and not of Thomson Reuters)

On May 31, the rupee fell to an 11-month low of 56.51 to the dollar. It wasn’t the only currency to suffer a loss. Most currencies depreciated during the month; some more than the others.

The appreciation of the dollar reflects an improvement in the performance of the U.S. economy and partly the related possibility of the phasing out of quantitative easing (QE) by the U.S. Federal Reserve. The latter would make the dollar even scarcer.

The threat of a junk rating

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(Any opinions expressed here are those of the author and not of Thomson Reuters)

Credit ratings by agencies are never very objective and their long-term outlook is also seldom accurate. Sovereign ratings, in particular those which are not solicited, are generally unreliable and often biased. But rating agencies do draw attention to critical issues that should not be ignored.

Standard & Poor’s announced on Friday that it had maintained India’s rating at BBB- with a long-term negative outlook. This assessment is based on three major considerations. The budget deficit, government debt and the current account deficit (CAD) are too high.

The resurrection of Congress

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(This piece comes from Project Syndicate. The opinions expressed are the author’s own)

The overwhelming victory of the Indian National Congress in elections in the important southern state of Karnataka in early May has shaken up the country’s political scene. India’s troubled ruling party had appeared headed downhill in the build-up to the next general elections, which must be held by May 2014. Now, following its huge win in Karnataka, all bets are off.

India Market Weekahead – Inflation, FII inflows to be key

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(Any opinions expressed here are those of the author and not of Thomson Reuters)

The bulls are back and their four-week winning streak saw the Nifty close at a 29-month high of 6107 on Friday, up about 2.75 percent for the week. Liquidity flows remain robust, fuelling the momentum despite political heat in New Delhi.

The Congress win in Karnataka boosted positive sentiment, followed by industrial output data that was marginally better than expectations. The overall earnings season has been favourable and along with the global rally provided the right environment for the markets to cross the psychological barrier of 6100 in the Nifty and 20000 on the Sensex. The only thing missing is euphoria on the street and broader participation by investors.

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