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Monday, June 09, 2014

INDIA, ECONOMY, RUPEE SHOCK

 

Indian Economy and the current Rupee Shock

 

"Overall performance of the Indian economy and its industries are going to be negative for the next one more quarter in an conservative node. Recovery from the down slide will be time consuming and will be severely dependent on global and macro factors. Even RBI has minimum space of easing interest rates since inflation would be back due to rising cost of input."

 
Indraneel Sen Gupta  
   

When I started writing for the day I read an article which might have been read by you too that valuation of rupee will touch to 63.Well I don’t know what type of models they have taken for calculation but what we are forgetting is the valuation of the rupee has already taken toll on the corporate earnings for 2012-13 and also on the governments revenues. I did not use any such models to predict the range of rupee in my article written on 26th April 2012 that rupee will range between 54 to 57 levels. I used simple macro factors to put the range. Rupee will climb backed by shift of foreign treasuries from Indian economy as their is an requirement of capital in other economies. I did not give an asset allocation model or suggest any sector for investment. I gave the economic picture for the Fy2012-13 and the financial performance that will come in the form of quarter results for the next 2 quarters of FY 2012-13.

 
AFTER SHOCK

Rupee will cool off may be in the next month but the affects of the depreciation shock will be required to be absorbed by the Indian economic growth. It means that now our focus is on controlling the rupee free fall but the aftershocks will be more painful for the economy in coming months.

• Import oriented sectors will have to bite very hard due to rising cost of import. Well oil marketing companies are the major absorbers of the damage of rupee depreciation I find the affects to spread like an malignant cancer across all sectors and all economic corners of India. Nearby 50% of rupee depreciation between May 2011 and May 20112 has added additional rupee cost of imports to the nation by Rs.960 billion despite decline in the global prices of two major imported products crude oil and thermal coal. When international crude prices are hovering below the $100 barrel mark India still have to spend its import bill of crude valuation coming around $125 barrel. We failed to get any advantage of low valuation of the international crude prices.

• For more than a year we are busy fighting for the inflation to come down but now the same inflation is jumping back into the playground. With valuation of rupee around 55,FMCG companies are just planning to pass of the extra cost of import of raw materials and other stuffs to the consumers. Increase in grocery bills are going to take an huge toll on consumption for FMCG segment. FMCG products such as soaps, detergents, deodorants and shampoos, of which crude oil is an input, are likely to become more expensive due to increase in import bill of crude.

• Cost of import of iron ore and other raw materials for production of steels and iron is spooking up the price of metals resulting higher cost of projects. It has been found that project cost are just taking a 100% jump backed by rupee and delay cost (idle cost) in project execution. Lay-off and close down of business units are or on the anvil.

• Poor performance of the market and weak sentiments across the board is also taking a hard toll over the financial industry. Brokerage income has become negligible, position are better not taken and even in very small quantity. Many brokerage houses are changing their business models and even business too. Payments of salaries are now a nightmare for most of the brokerage houses. Many brokerage houses have either scaled back or shut down their equity trading divisions. In fact I find that many brokerage houses are available at cheap valuation to those who wants to enter into this financial industry.

• Those who loved eating fried items will have to take accept less and more savings of the doctors fess for treatment of belly fat. Rising rupee has increased the cost of vegetable oil. For instance, in November-December 2011, the price of refined soya oil shot up by Rs.75 per 10 kg from Rs.651 to Rs.724 and now its scaling to Rs.900 mark.

• Foreign education has become costly that many students are making an bee line in front of domestic colleges, shedding of their dreams of overseas degrees. For example with the rupee weakening, the burden has increased. The rent ($378) of a room he shares with friends was Rs.17,000 (at Rs.45/$) in mid-August 2011 when he went. Now, it is Rs.20412 (Rs.54./$). A meal ($6) which cost him Rs.270 then now costs Rs.324.

• The falling rupee is bad news for itinerant Indians and vacationers to a foreign country. Air fares are going up due to an increase in fuel surcharge. The stay will be costlier by at least 37% to 8%. Also, shopping can become expensive by 7%.

• Delay in project execution and eliminating projects results to less revenue generation for the government through customs and excise duties. Indirect tax collection will be less compared to targeted levels. Weak consumption will also reduce manufacturing activities resulting less indirect tax collection for the government. The rupee depreciation has erased the financial performance of the Indian companies for the next 1 more quarter if taken on a conservative note.

• Power thermal power plants are expected to face some strain on account of higher import costs of ferrous metals and petroleum products, which in turn are expected to remain firm in the near future. Power equipments which are mostly imported will find an substantial jump in its project costs resulting more slow addition of works for the industry.

• Fertilizers industry imports about 50% of its raw material requirement. Potassium chloride is one of the major import items and a decline is already being observed in the same. This trend is likely to continue in the coming months.

Well I am not going to deject my reader’s heart with all negativism. I have couple of positive industry but their profitability will be capped to their end and will not pass to the consumers.

• Pharma industry is going to benefit from the rupee depreciation for Fy 2012-13 since their products are mostly exported. More over I find the sector to be under mixed bag due to import of its raw materials which all affect the financial performance of the this industry.

• Gems and jewellery sector is also one of the industry which is going to gain from export of its business.

• Textiles industry is going to benefit with easing of cotton and cotton yarn prices and improved export realizations, the textile industry is expected to gain in the current forex environment. Mark-to-market loses on existing hedged positions and suitability of new hedging contracts would be crucial determinants of overall profitability.

CONCLUSION

But overall performance of the Indian economy and its industries are going to be negative for the next one more quarter in an conservative node. Recovery from the down slide will be time consuming and will be severely dependent on global and macro factors. I find RBI will have minimum space of easing interest rates since inflation will be back due to rising cost of input. Going through the above affects of rupee depreciation I find the financial performance of the companies will be weak and sarcastic. India will face more difficulty in controlling and reducing the fiscal gap. At the present level of fiscal deficit Indian government will add another Rs.38000cr as subsidy to OMC. Many brokerage houses will prompt its investors by picking stocks at cheap valuation. Well valuation will be very cheap but investments should be made predominantly in large caps to avoid further massive losses from down side compared to investment in mid cap or small cap. One should not get carried away by value pick tag line.

[Author is a Global Business Strategist & Global Macro Economic Researcher]
 

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