Indian rupee falling to Rs. 57 per USD and rising above Rs. 48 per USD

Currency fluctuation on international exchanges around the world can bring sleepless nights to any investor. Domestic currency volatility is a very fragile thing, and has impact on investors’ sentiments.

The USA dollar simply known as USD is the highest traded currency in the world. Euro takes second place in currency trading. In current weak global scenario, Indian Rupee known as INR, has depreciated more than 25% in a year, and has created deep impact on domestic and international investors’ sentiments.

Depreciation of INR against USD can invite mighty storm in Indian financial markets. The main reasons behind its depreciation are USD in demand, as investors thinking that it is a safe haven to park funds. Second reason is collapse of International trade; India’s current trade deficit is $ 13486 million, 4.3% of Indian GDP. Third is capital flows, Indian notices more capital outflows than inflows of foreign currency.

The major impact of INR appreciation or depreciation would be seen in Import – Export industry, corporate and organizations having large borrowing of foreign loans, students going abroad for study and travelers coming India for visit.

How INR depreciation against USD impact corporate?

When INR was at level 45 – 50 against USD, corporate have borrowed money from overseas, and in current situation where INR is at 56 per USD, cost of repayment of foreign loans and bonds are costly. Crisil Ltd. study shows that Indian firms are defaulting on loans as cost of repayment goes up. In meantime cost of borrowing too increased by 10%. In this scenario companies are losing cost advantage from ECB and Federal Reserve Bank, because their rates are at a record low than Reserve Bank of India’s benchmark rate. These events have direct impact on corporate net profits, and can lead in low dividend payments.

Companies such as Bharat Forge, Rural Electrification Corporation, Bharti Airtel and Adani Power are heavily depending on overseas borrowing for expansions. Sterling Biotech failed to pay $ 184 million of convertible bonds that matured on date. It shows that corporate interest coverage ratio is falling and interest payments are rising.

INR depreciation has also created doubt in foreign investors and FIIs. Fall in Indian Rupee would not give foreign investors expected returns, and they would start pulling their investments from Indian financial 

markets. By this INR would depreciate further because it would create lack in foreign currency reserves.

Research done by economist concluded that there is no direct relation between Indian stock markets and exchange rate, foreign exchange reserve, value of trade balance. But event would affect firms’ overall profits and this could lead towards stock prices fluctuation.

One of the major impacts of INR volatility is on Import and Export businesses.

Major Export items in India: Live animals, milk products, wheat, rice, coffee, tea, spices, cumin seed, tamarind powder, sesame seed, sugar, henna, herbal extract, medicines, fertilizers, chemicals, salt, iron ores, minerals, books, leather products, textile, dyes and pigments, home furnishing, footwear, brass items, Aluminum items, sanitary wear, ceramic, glassware, flanges, fittings, embroidered and Zari items, pipe and pipe fittings, handicraft, cables, medical disposables, laboratory equipments, surgical equipments, sports goods, wooden furniture and various other engineering and electrical products.

Major Import items in India: Cereals and preparations, Fertilizers, Edible Oil, Sugar, Pulp and waste paper, Paper, Newsprint, Crude rubber, Non-ferrous Metals, Metalliferrous ores and metal scrap, Iron and Steel, Crude Petroleum and petroleum products, Pearls, Precious and Semi-Precious stones, Machinery, Project Goods, Pulses, Coal and its derivatives, Non-metallic, Organic & Inorganic chemicals, Dyeing, tanning material, Medicinal products and Pharma products, Artificial resins, yarn & fabrics including silk, wool and cotton, electronic goods, wood and wood products, gold and silver, essential oils, computer software, etc.

In this Crude Petroleum and related products are imported around, $ 73.7 billion or 32% of the total imports. Hence, depreciation in rupee will increase import payment bills.

What steps Reserve Bank of India can take to stop Indian Rupee depreciation?

• Reduce trading limits for banks in foreign currency.
• Increase in interest rate for NRI and NRE bank accounts. 
• Open window for Oil import companies to do direct payments in USD.
• Issue special type bonds targeted to Indians who live in foreign, this will boost foreign currency reserve.

In INR depreciation or USD appreciation exports gets advantage, but in this scenario, international commodity prices would fall and exporters could not get advantage.

What if INR touch 48 per USD?

India would become cheap destination for foreigners and Indian tourism sector gets boost. It works inversely, as simple as, it gives advantage for importers. This event could take place if Government policies make India lucrative in investment and results in capital inflow.

But it has negative impact on Indian economy. Indian government and Reserve Bank of India maintain rupee value against basket of currencies, maintains level is around 50 per USD. In 2007-08, rupee appreciated by 13% over USD. Appreciation in INR has negative impact on exports and its industry margins. This has a little role to play in trade deficit, because India’s less export business will directly impact on trade. When INR appreciated in 2007-08, India’s FY 08 Q1 trade deficit was around $ 16,000 million. (In trade deficit case major role is played by import payments bills.)

Note: Study was done in July, 2012

How can the company leverage social media - Twitter - to grow its business?

Twitter is well-known micro blogging social media platform, where users can share, interact and build a network using 140 characters or less. Leading businesses and organizations use this social media platform to share news, latest events or product launches to their followers or customers. Companies like, Dell, HP, Microsoft, IBM, Starbucks etc are leader in it. Twitter currently has more than 140 million active users, generating more than 340 millions tweets per day on website.

Reasons, why companies should rely on Twitter to foster its business?

·       Connecting with customers and employees, by this company spread update on current or future activities.

·       Branding, on twitter company can promote brand image of its company through personal account or company logos etc., even organizations can set profile background according to companies brand and industry.

·       Marketing, companies use Twitter platform to market itself by tweets update, latest news about companies, online services to their customers etc.

·       Spy on competition, you can follow your competitor too. And on their tweet updates you can make strategies, or you can check how your competitor is serving their customers.

·       To grow upward in sales and profits, Dell is the company which reported $6.1 million sales through Twitter.

·       Brand loyalty, by regular valuable tweets organizations can increase its brand without any cost on social media platform.  

Effective and progressive methods, tools and applications to grow business on Twitter,

·       Promote your employees and their work story, by this employees feel proud about their company and followers get good impression towards company.

·       Promote company’s blogs or articles, and ask a question or explain what’s next? To keep interest level high.

·       Follow interesting people, if you find someone who tweets interesting, check out who he/she follows.

·       Use direct messaging for one to one conversation, and utilize short URL option to make URL tiny.

·       Communicate to others tweets by reply, and retweeting on others posts. It is a best way to grow community.

·       Use hash tag or #tag, added to your tweet acts as a way to create categories, groups or topics for tweets that can others read as well. This can be use as promoting events or product launches etc.

·       Twellow, twitter phone directory that short people by industry and makes it simple category format. This can be a great way to find people in your industry or company domain.

·       Tweet Facebook application, your tweet will be automatic shown if you change your Facebook status.

·       Use twitter filter to survive from overloaded tweets, this tool automatically filters devalued tweets.

·       Advance search, by this you can find old tweets based on words or phrases or by any hash tags.

·       LinkedIn users can automatically update their tweet status by their LinkedIn status updates.

·       Manage your tweet activities by software called TweetDesk; this can keep an eye on each tweet activities.

 All features and techniques mentions in this research from twitter are free of cost. For this all you need is a professional profile and to maintain professional status on all these social media websites. Cost for particular activities are not too high, you just need a person who is sound enough in finance knowledge and interest in social media activities. Other alternative is to give access of these social media platforms to selected person in a company or a department, like, Heads of Department, senior analysts, equity researchers etc. In this I would prefer not to give access to under matured person or newly hired employee in a company. 

@rutvij_bhutaiya (Twitter) 

Adversity causes some men to break; others to break records

Mike Ditka once said, “Before you can win, you have to believe you are worthy.” All old philosophy talks, aspires human to win races, whether it is in surpassing businesses or sports. But at the end it is totally and absolutely rely on a person, who not only think he can, but as Mike said to believe in once capability.

In sports and business, competitions were there, and always will be like a cut-throat. It is not about escaping from glorious events which challenge, but it’s all about challenging those events. Performance in a particular event fully depends on a ‘person’, it’s his or her goodwill or intangible assets which decides whether its breaks confidence or breaks record.  Recently, Olympics decathlons, Dan O’Brien said in an interview, ‘In a long run consistency always wins.’ It may be possible that at the end of such events, success would not be with you when you say ‘Good Bye’ to playground, but yes, it totally depends on that person, that how he is going to play his next game. Either player wins or lose the game, there is always an opportunity, an opportunity of learning.

Confidence plays vital role in ideology. And from where a person gets that confidence? This again depends on persons to persons, how he built their rules and ethics, theories which he believes in – for a game. I believe that if a person has done enough net practice before the real game, he doesn’t need to pursuit trophy. At the end; his confidence – which he earned from practice – keeps him calm and winner. After that winning or losing doesn’t matter, what matter is learning, so that in the next game he built himself enough to break records.

In this I have mentioned person’s confidence in general terms, but how an individual can magnetize towards record breaks or bounce backs in confidence. It depends on individual’s commitments and its core competencies. No one can argue on I can’t climb Mount Everest or I can’t take F-16 in blue sky, because only I know my limitations and only I can define my boundaries. Now question is if only I can define myself, then who is responsible for a breakout or record breaks? We will never get this answer outside because it is already answered – inside us.

Impact of High Fiscal Deficit on Indian Financial Markets

Recent article by S&P rating agency, threatened India to degrade its rating to junk. One of the reasons behind this warring is India’s fiscal deficit and its consequences on Indian economy.

Fiscal deficit measured on two factors in any economy, first total expenditure and second total revenue. Fiscal deficit is difference between government spending and government revenue for particular year, excluding money from borrowing. It is also known as budget deficit. India’s fiscal deficit for FY 2011-12 was 5.9% of GDP and is estimated 5.1% of GDP for FY 2012-13. But poor structured fiscal policies and external factors like, Euro crisis, inflation, slow growth in economy etc. could bring fiscal deficit at 6% or more level of GDP.

In FY 2011-12, Indian government’s revenue was Rs. 8, 44,912 crore, and in Union Budget 2012-13 it was estimated Rs. 9, 77,335 crore for FY 2012-13. In which, major source would be from tax collection, around Rs. 9, 35,685 crore. In total revenue taxes are contributed around 78% of total, and in FY 2012-13 it is estimated to grow around 22.7%. This estimation was made on new tax reform, Direct Tax Code (DTC), but delay in DTC implementation may fall short on estimated figures.

Indian Government’s total expenditure is divided in plan and non plan expenditures through the year. In FY 2011-12, government’s non plan and plan expenditure was Rs. 8, 92,116 crore and Rs. 4, 26,604 crore respectively. For FY 2012-13 is estimated by Rs. 9, 69,900 crore and Rs. 5, 21,025 crore for non plan and plan expenditures. In FY 2011-12 total growths in government spending was 10.1 % against original budgeted 3.4% and non plan expenditure was up by 9% due to high subsidy payments.  It had direct effect on fiscal deficit levels. Total subsidy for FY 2011-12 was Rs. 1, 43,570 crore and for FY 2012-13 estimated Rs. 1, 90,015 crore, these changes are due to high crude oil price and its import which counts 33% of total and rupee depreciation in context of other external factors. Non plan expenditures for FY 2012-13 are Rs. 9, 69,900 crore in which interest payments are Rs. 3, 19,759 crore. This indicates increase in borrowing, which is around Rs. 4.79 lakh crore. This results in government securities and bond market volatility.

Suppose India’s fiscal deficit reach at 6% level of GDP then its consequences could be worst enough to shrink India’s GDP growth by less than 5%.  India could face high inflation, because of rupee depreciation and its impacts. And this could cause exchange rate fluctuation. In FY 2009-10 when fiscal deficit was at 6.9% of GDP, inflation was all time high at average 14%. This would further accelerate to balance of payments crisis.

Increase in fiscal deficit and government spending would necessarily increases interest rate of government securities. And this would induce the rise in net private sector savings to support government borrowing. And consequences would be ‘crowding out’ of private sector.

How crowing out takes shape due to high fiscal deficit? To finance fiscal deficit government will borrow from other countries, and this will result in higher central bank’s rate and will discourage private borrowings.

Bond market would see high volatility because of these events. Bond prices fall and yield increases as market expects a higher supply of government securities. Banks are largest buyers of government securities and bonds, would face losses in particular investments.

Estimations from the macro econometric models suggests that an increase in the budget deficit by 1% of GDP would raise long term interest rate by about 50 basis points after one year and about 100 basis points after ten years. 

In Union Budget 2012-13, Indian Finance Minister estimates to reduce fiscal deficit to 5.1 % of GDP, through reducing total subsidy expenses by 2% of GDP to 1.5% of GDP in next three years. But these steps are not enough. Government can reduce fiscal deficit by increasing revenue or decreasing spending. To increase revenue government can increase tax brackets (including direct and indirect taxes), but by this demand will fall and business investment activities will come down. Is last few years government cut subsidies in sectors like education, health and poverty alleviation and it created inverse effect in booming demand. For FY 2012-13 government target Rs. 30,000 crore incomes by disinvestment activities, but it cause negative impact in long term. The Public Sector Units (PSUs) that the government disinvesting are profit making firms like Oil and Natural Gas Corporation (ONGC), Gas Authority of Indi Limited (GAIL) and Life Insurance Corporation (LIC). From these firms government earns lump sum amount at the end of financial year, and by disinvestment government will lose profit on it.

As growth target remains high, cost of borrowing would be at higher level. To support spending government is limited on money creation because it will fuel inflation and external borrowing because it will increase debt burden.

Implementation of DTC in next year and allowance of FDI in retail and aviation would help India to bring down its fiscal deficit. 

Greece no longer a part of European Union

After June 17, 2012, Greece will have two choices. First, continue with Euro currency and be a part of Euro zone. Second, separate from Euro zone and introduce its own currency ‘drachma’.

Whether Greece stays in EU or leaves EU, Indian financial market will follow global sentiments. Based on this study one can say that Global and Indian financial markets will see little progress, until there are other external factors in India like, Inflation, GDP figures, fiscal deficit etc.

At this stage 70% suggest that Greece would remain in Euro Zone. Even The U.S.A. president and IMF chief want Greece in Euro Zone.

Why countries and global leaders want to save Greece through bailouts or liquidity injection, even after world is aware about Greece’s debt and possible default risk on it?

Greece’s economic crisis turned into fully political crisis. If Syriza party comes in power (which has high possibility in June re-election), would cancel bailout deal. And Europe and IMF will stop loans to Greece. By this Greece would be no longer able to pay wages, pensions, essential services etc and probably run out of cash in July. And Greece will default on debts.

If Greece leave Euro Zone then country will introduce new currency, drachma. And drachma would depreciate by 50% -70% with compare to Euro. And Greece government bonds will be worthless, which are highly exposed by German and French banks.

Greece exit from Euro Zone would not create direct impact on Indian financial markets but indirect effect would repeat 2008 crisis scenario. In case of direct impact, Indian has 0.14% of total export to Greece, which is negligible. But if Greece default and decides to exit Euro, then global crises is imminent.

India’s exports growths are linked with global growth. India has great exposure in Europe market. March 2011, total exports to The U.S.A. were 10% and to Europe were 18% of the total. This indirect effect would make India and Europe trade suffer. EU imports from India, Manufactured Goods: 9,572 million euro, Machinery and Transport equipments: 7,004 million euro, Textile and related articles: 7,326 million euro, Clothing: 5,131 million euro. These are the major imports of EU from India, and these sectors would have more impact.

Euro is known as second largest currency reserves in world after The U.S.A. dollar. Greece crisis is depreciating Euro as well. This will devalue commodities, like Gold, Silver, Crude oil etc on commodity exchanges around the world.

This Euro and Greece crisis will make The U.S.A. dollar the safest haven and investors will lure towards that. By this Indian rupee will depreciate more, and would result in inflation, fiscal deficit rise. In this macro concern and domestic factors, FIIs will lose confidence in Indian market, and would further make Indian secondary market more volatile. Even in last three years EU’s FDI with Indian has also shown negative results too, In 2009 and 2010 outflow was 3.3 billion euro and 4.7 billion euro respectively, where inflows in same years were 0.8 billion euro and 0.5 billion euro respectively.

This will also cost high to Indian banks and corporate to raise funds from foreign countries. And this will result in low growth and profit to Indian banks and corporate.

Along with this Indian IT sector has 20% - 30% earnings from European countries, this will drag down Indian IT business. 

A story of Three Musketeers: volatile currency and its risk on FIIs

Once upon a time there were three rich men in the United States of America. People nick named ‘Three Musketeers’. Three Musketeers were seeking opportunity to invest their capital in to emerging countries. One fine morning they heard about place called ‘India’. Three Musketeers decided to invest their USD    2, 00,000, a country called India. India’s currency is measured in rupee, widely known as Indian rupee or INR. Three Musketeers choose to invest in Indian secondary markets. To invest in Indian securities they need to convert USD to INR. Hypothetically, As per the 1^st May, 2001 1 USD=51 INR. Three Musketeers invest USD 2, 00,000 on 1^st May, 2001.

Three rich men done one mistake, they forget to calculate risk on currency fluctuation. They contact risk manager from such and such risk analysis firm. Hypothetically, Risk manager predicted two situations, to ensure whether Three Musketeer’s invested money is safe or not based on INR fluctuation.

Situation A:

First he assumed, on 2^nd May, 2001 INR appreciate up to 50 INR against 1 USD. Here we assumed that Three Musketeers investment has not done any profit or loss on their invested capital. Suppose if they want to pull out their invested money then they get USD 2, 04,000 (after converting it from INR to USD as per current currency rate). Without doing anything they earn USD 4,000 (ignoring all taxes).

Situation B:

Assumed, on 2^nd May, 2001 INR depreciate up to 52 IND against 1 USD. Here we assumed that Three Musketeers investment has not done any profit or loss on their invested capital. Suppose if they want to pull out their invested money then they get USD 1, 96,153 (after converting it from INR to USD as per current currency rate). Without doing anything they earn USD 3,847 (ignoring all taxes).

From both of these case situations we can conclude that how important is to understand forex market and currency fluctuation of domestic and international country.

In these hypothetically situations we neither took profit and loss in calculation nor levied taxes.

Just think and assume situation B, even if Three Musketeers make profit of INR 50,000, they occur loss of USD 2,885 (ignoring all taxes) if they pull out their money on 2^nd May, 2001.

Indian rupee depreciation and currency fluctuation are the biggest concern for Foreign Institutional Investors (FIIs).

For more on Indian rupee depreciation: Volatile currency, INR :

http://rutvij-bhutaiya.blogspot.in/2012/02/volatile-currency-inr.html

Analysis,Union Budget 2012-13

First union budget was presented by Mr. Chetty on 26^th November, 1947. From 1947 to 2012 union budget has sincerely followed its ‘parampara’ in Indian context.

Does Union budget 2012-13 satisfy, ‘I’ (taken from BRICS nations)?

From 2012 year India is entering into 12^th five year plan; focus is faster, sustainable and inclusive growth. What are those indications, which Mr. Mukherjee tried to reflect on 16^th March, 2012 for upcoming five year plan?

India share its prosperity with world through three main sectors, Agriculture (contributes 18%), Industry (26%) and Services (55%). In India inflation structure is largely driven by agriculture. To bring down inflation government introduce schemes for short term crop loans, cash inflow in rural banks and raised agriculture credit.

To maintain sustainability, India should sound strong in its financial sector. Funds inflow of 159bn, to capitalization of PSB, RRB and financial institutes. To improve investment; infra sector is open for foreign investment, QFI get green flag in Indian corporate bond market, STT cut from 20% to 0.1%, also by simplifying IPO process, to reach more retail investors.

Union budget 2012-13 gave some fresh oxygen to individual in direct tax, by basic exemption of I-T raised to 2 lakh from 1.8 lakh, additional deduction from saving bank account. These will results in high disposable income, which would impact on demand-driven growth.

To tap fiscal deficit government find direct way through raising indirect tax. Central excise duty and service tax increase by 200bps, this will increase inflationary pressure and delay in the interest rate cut. Custom duty remains unchanged, but to control domestic saving, custom duty on yellow metal has been doubled.

Major industrial impact,

On Automobile industry impact would be neutral, reasons are, excise duty increased by 2% but manufacturer would pass this burden to users, increase in import custom duty will force manufacturer to increase assembly activities in India, in-house R&D facilities gets benefits.

Power industry has positive impact, by exemption from custom duty on coal and LNG, will boost power production and reduction on withholding tax on interest by ECB from 10% to 5%, will increase funding.

Cement, Fertilizer and Metal & Mining industry would see positive impact, while other side Oil & Gas and Real Estate industry would see neutral impact. Parma will face negative impact by levy of Minimum Alternate Tax.

Union budget has its unique impact in each sector, this year for some it’s aesthetic and for some it’s dry.