India at Crossroads - 2

Lets continue our discussion from last post. Before that, got some queries about DXY and where can it be seen. Here is the link.

Now, as for the Rupee level, as I said, I would like to see Rupee find its level naturally. There are few reasons for that. First of all, RBI does not have luxury of excess reserves which it can afford to splurge on supporting rupee. Our reserves are a phony figure because we run both Current Account and Fiscal Account deficit and we need those reserves as a cushion unlike China which actually have real reserves due to its huge trade surpluses with rest of the World.

INR at 56 or even 60/$ can bring some good news for Economy. At this level, even the brain-dead politicians will realize that they cannot subsidize petroleum products endlessly. They have to (had to, already 7.5 hike and 1.6 rollback has happened) pass on some burden to users. When this happens then users tend to use these products judiciously. Also the industries which are importing raw materials will feel the pinch and will want to improve efficiency to reduce this added cost. People who want to go for a foreign tour (on a budget) have a re-think and may settle for vacation in India this summer. NRIs will want to use this opportunity and send some more money to India. All in all, demand for Imports goes down, $ inflow starts to get better.

However, real advantage of falling Rupee is for Exporters. Imagine a case where I am making something at INR 60 and I want to export it. When INR/$ was 50 I would quote my price at 1.2$. I may be competitive or I may not be. Rupee depreciation gives me the liberty to quote my product at 1.0$. If I am facing the competition then I would reduce the price in direct co-relation. If I do not have competitive pressures, I would improve my margins and pass on only some part of depreciation to my customers.

Simply out, China today is the manufacturing power-house of the World not because of a strong Yuan. On the contrary, keeping Yuan artificially low as the state policy is the single biggest factor which helped China have massive reserves and trade surplus with every other nation in the World. We Indians, tend to think emotionally and feel bad when Rupee slides against $. We take pride if Rupee is stronger and start to feel as if we are already developed nation.

Thinking just little below the surface will expose how strong rupee is a bad thing for us right now. in 1990, we were forced to devalue the rupee. Now it is happening on its own. Situation in 1990 and today have a major difference which is state of the Private Sector in Economy. In 1990, our companies were all working like Government Organizations, no competitive edge, no global operations, no real profits or cash. Today our Private Sector is much more vibrant and in a better condition to exploit the weaker rupee. We can get many BPOs back from the Philippines with he help of weaker Rupee and create some jobs for the youth. These are the people who are driving the Indian Consumption story and closure of BPOs is a blow for them. There are already serious indications about even the Consumption is going down and there is a simple co-relation between more unemployed youth and less public spending. A weaker rupee can set these things right in a very little time.

Have been writing this post in bits and pieces so you may find it lacking continuity. My apologies for that but my Project deadline is in this month and I am really stretched thin in various directions. That will not stop me from writing though. In the next post, I will probably touch upon what I believe will happen and how the things will pan out for India, Markets, Gold, etc. I also have to write about the Credit Card query and I really feel bad for not doing that.

After these couple of posts and after my project is over, I plan to consolidate my blogs in one. That will simplify things for me and then we will carry on with trading posts as well as Technical Analysis tutorials. Lets hope God does not dispose what I propose. Keep your comments coming in. They push me to write more.

India at Crossroads

As promised, I am writing about fundamentals of our country and I hope you will enjoy this attempt as much as my technical writing so far.

The question probably everyone is asking is what went wrong suddenly? We were cruising pretty well. In spite of slow down and Europe turmoil we were doing pretty decently for ourselves. Inflation was coming down, RBI was to start lowering policy rates, growth were to pick up and all that. What happened?

It is difficult to pin point as to what exactly was the tipping point of all this but if I have to choose one, I will choose our General Budget as the proverbial nail in the coffin. Government has been fiddling with policies and overlooking long term impact of postponing reforms (probably in order to make sure the reign of Prince in Waiting, Rahul Gandhi) since long. However couple of announcements in the budget were too much.

First was Retrospective changes in the Taxation laws. It really spooked the Foreign Investors.

Imagine a case where you have bought a house or car and suddenly you are asked by Government to pay substantial tax on that after 5 years. You go to court (Supreme Court mind you) and get a decision in your favor. Story should end here... but not in India. Government, rather than being a mature party... behaves like a brat and changes the rules of taxation and also makes them effective on past transactions too. With this case in mind, would someone buy a house or car in India?

Now I am not saying that Vodafone is not guilty here. Their transaction was totally built in such a way only to avoid tax in India. They were also served a letter saying that they will need to pay tax on the said transaction. So they are not totally innocent and Hutch was supposed to deduct their tax at source. That did not happen but more than that... what I think, is that they probably pissed off someone in Government in a wrong way. Result: Government wants to collect tax from them at a cost which could be multiple of that amount for the rest of the economy.

It is a very difficult call whether to let the Vodafone go scot-free in this case ot not but this whole thing could have been done in such a way as not to scare FIIs so badly. When your imports are much larger than your exports and you depend on all the FII/NRI money to balance your accounts, you do not play ball with them without rules. With no FII money to help Government limit the deficit, see how quickly we have come to 56 INR/$.

Second bad provision in budget was regarding VC/ Angel funding for start-ups. To cut the long story short, it was probably a good initiative with no thinking about the complexities involved in its implementation. It gave discretionary powers to IT officers with onus of proving innocence on assesses. It basically meant you are guilty (of tax evasion) unless proven innocent. This was a punishment for genuine start-ups who need these funds for the fault of few who misuse these arrangement to evade some tax. This provision created doubts for VC funds and slowed their economic activity.

Now impact of such provisions is not counted only in terms of the amount of money which froze, it also affects sentiments. And in today's world, it matters a lot. The announcements in budget created a impression about how unwelcome and unreliable we are to investors. People in today's world, marred by US housing bubble, scarred by Europe... may settle for less returns but they will prefer security of their capital and clarity about their liabilities. They will want clear policies and faster decisions and simply hate uncertainties. Can't blame them.

Another reason for fall in INR is the increasing strength in US $. In last three months alone the DXY has reached above 82 from a level of 78. This is also hastening the decline of the Rupee.

Now the real question is whether RBI should intervene and stop the slide of Rupee further? My call; NO. RBI should let the Rupee find its own level dictated by Market. It may not be a bad thing for Economy. On the contrary, it may be best thing to happen to economy in a long time.

More on that in next post.

I hope you will like this return post and keep encouraging me like earlier to write more. Looking forward to your comments.

I will be back

Hello frens, off late I am getting lot of requests from many of you to write again. I have been away from blogger for variety of reasons but somehow I also think that it is about time that I get back to it.

I will consolidate my 3-4 blogs in one place as that will simplify lot of things for me. Also though I like to follow technicals, I believe one post about fundamentals of country is called for given the dire situation in INR-$, NIFTY, Deficit...

Will write that first before anything about trading or tutorials and hope to complete this reorganisation and posting this weekend. From then, will try to follow some manageable frequency of posting.

Thanks for your patience. Hold on for coupe more days