Hedge Yourself! Rupee heading for 65!!!

Markets, today, fell most in the last 4 years. Sensex tanked 769.41 points to close at 18598.18 while Nifty closed shop at 5507.85 levels, down 234.45 points (4.08%). Only 3 scrips in the 50-stock Nifty basket ended in green while the top losers on Nifty lost from 8-11%.

 Rupee touched an all time intra-day low of Rs 62 before closing at 61.55 per dollar, again a record on closing basis. The reasons for today's massive fall are many fold including the one making the loudest buzz of Indian govt resorting to Capital Controls to stop the rupee rot. Statements by both RBI and GOI are trying to assure the foreign investors that nothing of such sort is being done. And I think they should not even think of trying any such gimmick in a country where you don't have control on most of the things. At one time, we were having pretty strong portfolio (of black money) at Swiss Bank!

With the arrival of September, Investors would get more jittery at each and everything that US Fed says (or doesn't say) about the QE program. They are likely to tone down the easy money that they have been providing to the market. That's a problem for our country primarily on two accounts.

a.       External Debt (primarily Short Term Debt (STD) maturing in next 7 months)

b.      Current Account Deficit (CAD)

First, the issue of External Debt (ED). India's ED stood at $390 Bn as of March 31st, 2013 - Higher by 12.9% YOY or by $44.6 Bn. Of these, around $96.7 Bn is short term debt i.e. their maturity is within a year. And among the rest $293.4 Bn long term debt, 25.78% of them have to be repaid till March 2013.

The above image shows that India has to repay $172.346 Bn by March 2014!

And our Foreign Exchange Reserves stands at $ 278.602 Bn as of August 9, 2013.

Well, it seems OK?

No. This reserve has been falling quite drastically of late.

RBI Foreign Exchange Reserves:

The big negative figures are there for oil payments that mostly happen in the last week of every month. With Crude Oil heading higher in the world markets, expects the bleed to exacerbate in the coming months. 

RBI has lost close to $12 Bn so far this year and reversing this loss is little tough. Fall in rupee will certainly make our exports competitive going forward, infact last month's trade data gives inkling for the same, however, the effect will take some time to kick in.

Corporate India has an external debt outstanding of around $200 Bn as of March'2013. Out of these, around 45% is short term debt (i.e. $90 Bn). Worse, only 50% of it is hedged.

Thus, if rupee fell some 15% in the past few months, these 50% unhedged debts worth $45 Bn have made a dent of additional $6.75 Bn in the borrowers' balancesheets! On an average of Rs 57/USD, that’s Rs 38,475 Cr!

(Net Profit of 3137 companies for the June quarter was Rs 70,264.64 Crores.)

How bad is the situation?

Some facts:

STD-Short Term Debt; ForEx-Foreign Exchange Reserves;

Thus, although the situation has worsened since the 2008 crisis, its nowhere close to the situation we had in 1991.

Now let's look at the second leg of calculation: CAD

CAD for the year 2012-13 was at $87.8 Bn or 4.8% of GDP. CAD for this fiscal year is expected to be somewhere around $100-110 Bn. Much of last year's CAD was financed by short term money. Rest was through ECBs, Portfolio investments and Trade Credit.

Well, short term money is running out and ECBs have turned expensive. Portfolio investments are drying while trade credits are getting stricter.

Result? Expect a big dent in Foreign Reserves of RBI this year.

No wonder, RBI & GOI are trying anything and everything in their armor to cut down useless spending of Dollars.

But results are not encouraging so far. India imported 845 tonnes of gold last year! In the past 3 months, we have imported around 240.6 tonnes with 146 tonnes in May 2013 only as the gold prices crashed. Gold demand picks up during September and October due to festivals and no government control can stop Indians from buying gold during these periods. If they won't let them buy it fairly, the gold would reach through black markets!

Not just this, government has already spent more than 50% of its budgeted amount in the first 4 months of the fiscal year. Given this being an election year, it would be tough to contain fiscal deficit without stifling growth measures.

FIIs have invested close to Rs 73,000 Cr in the Indian bourses since Nov 2010 - under QE regime. QE tapering will pull this money out from a depreciating currency to an appreciating US currency.

The pressure on INR is here to stay and slowly but gradually, it will go down further. Rs 65 looks a fancy number and several analysts/economists are making the prediction for the same. I too feel 65 may be on the cards given the present scenario.

However, USD may not strengthen as much as it is being touted for. US has to resolve its debt ceiling issues once their ministers are back after August-break. That would make the markets very volatile, especially since it’s a politically sensitive issue there. That would make the investors to park their dollars in some safe places till the issues are resolved in their country. The other ray of hope is reversal of trade deficits that India is facing so far.

And also, if RBI/GOI do not make unnecessary mess!

Till then, enjoy the fall :)