Declining Gold and Rupee

Current state of gold and Indian Rupee

From last few days, Indian rupee and gold prices are in limelight. Yesterday, the rupee had made record low of 59.9850 to the dollar. The sliding of rupee reflects the stress state of Indian domestic economy. The currency has lost 11% since May. Our economy is facing challenges like high current account deficit and lower capital flows. The major impact of this sliding of rupee to dollar can affect the credit rating of India. At present, S&P has already maintains negative outlook whereas Fitch and Moody has maintain stable outlook for India.

Sliding rupee will impact on our industry significantly. Software and pharma industries will boost their profit as their major revenue depend on export. Automobile, capital goods and telecom sectors will feel some pinch on their profit margin.

Gold has also gone low 5 % yesterday after US Federal Reserve signalling of possible scale back in stimulus. I always consider gold as a hedge instrument against inflation. It is non yield bearing asset.  In US 10 year treasuries bond is in 2 year’s high so investor have attractive option of invest in bond. With bond yield rising we are beginning to see liquidation out of gold. Spot gold has also touched the lower level since October 2010.

Demand of gold in India has slowed in this week due to government’s curb on import of gold. According to many technical analyst it may be fall below 1200$ an ounce. In this year, it has already come down 23%. We will witness the huge volatility due to trading community in gold. Today morning, many of buyers of gold is attracting for purchase due to its fallen price. This sentiment may give some support to its price.

The overall impact of weak rupee will be seen as hike in fuel prices, expensive foreign education, costly vehicles and electronic items. The attraction for gold of Indians will be continued as it is well known fact.

For more detail about any other query related investment, you can contact me through my email.

Regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com

Weakening rupee against dollar

Rupee at all time low against the dollar

Today’s very important news on all business channels are that rupee has trading all time low against dollar. Every analyst wants to know that what is the reason behind this weakness of rupee and how would it impact on overall economy. The rupee has been falling for five straight weeks. Right now it is at 57.92.

According to analysts, there may be many reasons for this weakness. According to my view, the widening trade deficit of our economy is the prime reason for this slide. However, government is struggling to control it but has not got succeed till now.

There is overall consensus among the masses that the UPA government is not likely to implement the reform programme. It is unlikely for this government to generate heavy capital inflows for reform the economy. Oil and gold imports bill are still worry factor for deficit.

Foreign Institutional Investors are selling index future for hedging their stock position. It is again expectation of weakness in the stock market in near term. The main reasons behind this slide of rupee are weak economic fundamental and widening trade deficit.

Exporters like IT firms will gain from this rupee weakness as these firms earn majority of revenue in dollar term. This weakness would also give some support to falling gold prices. The gold prices has been down in rupee term 15% during 2013.

It is bad for the student who wants to go abroad for higher education. It will increase India’s current account deficit as oil companies will pay in dollar term. As of now, the global prices of oil are falling so not near term threat for price hike. The companies who import the raw material would be affected by this weakness of rupee.

For more detail about any other query related investment, you can contact me through my email.

Regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com

Impact of current falling of  Indian Rupee against US Dollar

We all are witnessing falling value of  the Indian rupee against the US dollar. Our policy maker and economists are trying to find out the way to come out from this situation with their best efforts. RBI has become mute spectator as it has no more options to stop this fall. The windfall from a 23% drop in the value of the rupee against the dollar in the last one year has impacted our equity market, debt position of the corporates , fiscal deficit , capital inflow, import and export figure and overall economic environment. It is very difficult to analyze the overall impact of the falling rupee but here in this article we are trying to study the major impact of falling rupee to the some extent.

Impact on Export and Import Industry

In normal sense, a depreciating rupee should have made Indian exports cheaper and more competitive. But in this fall exporters are not happy due to a combination of shrinking global markets and rising import content of Indian exports, a weakening rupee does not necessarily translate into enhanced exports. Worse, because imports are largely inelastic, with oil and gold accounting for 44% of India’s purchases from overseas, declining exports can only mean that the trade deficit would widen, putting further pressure on the balance of payments.

A weak rupee should make exports cheaper and imports costlier. Both these should have a positive impact on the trade deficit and current account deficit, which is somehow not happening. A part of the problem is that over the past few years, the composition of India’s exports has changed in favour of value-added products, in contrast with the past when primary products and textiles products dominate in import segment. While sectors such as engineering, chemicals, and gems and jewellery have been the key drivers of India’s exports, due to a high import content in such products, the depreciation of the rupee does not fully translate into gains for exporters.

It is a big challenge for India to assess the fair value of its currency. Sometimes, speculators can take the currency far away from its fair value. The rupee depreciation will also put additional pressure on domestic inflation by making imports costlier. A 10% depreciation could have an impact of 140 basis points on inflation over a period of time. (A basis point is one-hundredth of a percentage point)

Impact on debt

On account of their aggressive global expansion strategy and the need to find cheaper sources of funds, as opposed to depending on costly domestic credit, Indian companies have taken dollar-denominated loans. The weakening of the rupee is expected to significantly raise their debt burden in rupee terms. Many information technology (IT) firms do see a benefit in their rupee revenue and, therefore, their margins and profitability, but for quite a few quarters now, the concern has shifted to the revenue front— particularly in Europe and the US.

Impact on capital inflow

Policy paralysis and an inability to pursue serious fiscal correction are great worry for foreign investors, particularly institutional investors. There is a risk of capital inflows holding out due to fears of a weakening rupee, which triggers another round of currency depreciation, setting off another round of a negative macroeconomic response. This has resulted in diminished capital inflows, which in turn have only increased the pressure on the rupee, pushing it down to a record low of 56.38 on 24 May.

Outlook

Since India is globally more integrated than it was in the past—not just in terms of merchandise trade, but also in the actual movement of people and a rapidly expanding corporate footprint . The uncertainty surrounding Europe, struggling with a debt crisis, has only made the outlook that much bleaker. A current account deficit that’s above 3% of GDP will be difficult to finance. The medium-term target should be to bring the deficit below that level. According to many analysts if the overall macroeconomic situation does not change, it is likely that the rupee will remain weak.

Regards,

Arvind Trivedi

Certified Financial planner