Market Maniac

Could the Rupee Hit 50 Again?

Despite the excellent (30%) growth in exports in June, India’s average monthly trade deficit over the past three months (April to June) has been more than $ 10 billion. The US trade deficit for May was $ 42 billion. This means that even though the US economy is around 12 times ours in size, its trade deficit is just 4 times ours.

Given that global markets had been beating up on the dollar for several years because the US trade deficit (and, to be sure, its budget deficit) was much too high, it would seem likely that markets would also start beating up on the rupee at some point since India’s trade deficit (as a percentage of GDP) is so much higher. [OK, Sanjay, I finally hear you.]

This view – that the rupee could weaken sharply and stay weak for some time – flies in the face of the default mindset of a large number of Indian businessmen, many of whom are largely unhedged on their foreign currency borrowings and import portfolios. Changing mindsets is difficult, which is why I have selected such a loudly provocative title to this piece.

It should also be of some concern to this mindset that the IT sector doesn’t appear to be entirely in the “rupee will strengthen” camp – most of the large players are now hedging out to just six months, as compared to the 2 to 3 years they used to look at earlier (2007-08). Again, the NDF market, which often reflects the views of global currency traders who largely punt on “fundamentals” is also looking at a much weaker rupee just one year out.

So, what’s the short point? Could it happen? Could the rupee hit 50 again?

Anything is possible, of course, particularly with fundamentals – trade deficit, double-digit inflation, and political sclerosis – stacked against the rupee. However, a lot depends on what the dollar does overseas.

As my ardent fans – one of them even compared me with Paul the Octopus – will recall, right before the start of the World Cup, I had forecast that the Euro would correct sharply, which it has. The correction appears to have stalled at around 1.30. I had thought it would run a while longer – say, to 1.35, high enough to break the pervasive Euro-bearish mood in the market. It may still happen, of course, perhaps driven by some more poor economic numbers out of the US. The basis point is that markets make substantive turning points only after they have done damage to a whole lot of views, and there are still too many unconverted Euro bears around.

Of course, what will trigger the turnaround in the Euro (and the dollar) is anybody’s guess.

To try to get a better fix on things, I called on my American economy thermometer – a close friend in the US, who has a small business, which designs and wholesales wonderful hand-embroidered pillows, hand-painted glasses, hand towels – “stuff” that America loves, but is hardly “must have”.

I caught him while he was at The Atlanta Gift and Home Furnishings Mart (a/k/a America’s Mart). Business was OK he said – the January show had been great, but this one was so-so. Then we did a “man on the street” show, where he stopped several other vendors at the trade show and asked about their business. These were all wholesalers, who feed major retail stores, whose sales make up nearly two-thirds of the American economy. Their product range was diverse – high end to low end, must-haves to highly discretionary. More or less across the board, their responses were that (a) the worst of the slowdown was long over, (b) some parts of the market (particularly New York) were rocking again, and (c) on a broad basis it looked like the economic recovery was slowly taking hold.

No champagne yet, but not just beans either, was his summary.

To my mind – particularly given the proliferation of double-dip gurus – this isn’t a bad prognosis. The US economy seems to be settling down. And, since America is America, once that steady-state holds for a few months, things would automatically break out upwards. If Obama is lucky, it could happen before the November elections. In any event, at some point, the modest optimism being seen by wholesalers will feed into a turnaround in US consumer sentiment, which may turn out to be just the trigger the dollar needs.

And, given the whole host of negatives weighing on the rupee, another round of dollar bullishness would certainly catapult the rupee lower.

But, 50? Well, something to think about.

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