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.

India’s missile man, Dr. A.P.J. Abdul Kalam

14^th May, 2004, I met India’s missile man, Dr. Avul Pakir Jainulabdeen Abdul Kalam. Till that date I don’t know anything about this person. But since that Friday he became my favorite leader.  On that Friday afternoon Dr. Kalam shared his thoughts with us at Rashtrapati Bhavan, New Delhi.

Dr. A.P.J. Abdul Kalam was born on 15^th October, 1931 at Rameswaram, Tamil Nadu. He was the President of India from 25^th July, 2002 to 24^th July, 2007. Dr. Kalam is renowned aerospace engineer, professor of Aerospace engineering and first chancellor of Indian Institute of Space Science and Technology Tiruvananthapuram. He is the only person who gave India “Vision 2020”. He is a great and stalwart leader.

Leadership practices by former President of India.

What are the models that leaders built to succeed in its term? In Dr. Kalam’s way it is creativity. Creativity brings knowledge in society, creativity encourages Innovative thinking. It changes person’s ability to think and generate ideas, like Google, productivity of creative thinking.

Second, model he talks about Law of Development, which stand on three pillars; enable resource to develop nation, technology, productivity. In technology he gave weighted to communication and importance of communication. Basic technology and Science is vital for any growth targeted sectors. Technology has two sides; it can lead to economic prosperity and create capability for national security.

Third, he added society grid. Society grid divided in four parts; Knowledge grid, Health grid, Rural grid and Legal grid. This grid system will bring prosperity to nation. It also adds value to nation in formal or informal way.

Dr. Kalam’s name is permanently added in the list of India’s great visionaries. In his words, Leader must have a vision for Organization. He is leading ‘Vision 2020’ for India, as a developed country by the year 2020. In that vision he included Agricultural and food procession, Infrastructure, Water mission, Sustainable Rural Development through PURA, PURA (Providing Urban Amenities in Rural areas) mission, Education development. He wants to make India Energy independent country by 2030, with the help of solar energy, Nuclear energy and Bio fuel energy.

As a leader, one should challenge the processes. Dr, Kalam says, ‘A leader must know how to celebrate the successes and manage the failures.’ Here he gave message, to handle success and more importantly how to manage failures. Because as a leader he/she has to come across failures in any field, and how he/she manages and bypass that failure without any negative effect on his team’s performance and productivity. In the challenging process, leader must have courage to take decisions. And if decision went wrong he has been able to take responsibilities. 

Mr. Kalam is a kind of leader, who believes in creating opportunities and creates leadership.  As per his view a leader must be able to explore uncharted areas. A leader must think towards welfare of society, and must have creative ideas to explore new opportunity and paths for people.  A leader should have nobility in management, when one is leader he do not thinks only about his/her own, but he has to thinks for management and organization’s purpose with people in mind.

A leader should be enough capable to motivate other peoples and encourage hearts. Here Dr. Kalam tells about how he was inspired by this role model leaders, how he studied and lived with great scientists. As he was keen to learn about Space science and technology leadership qualities that underscore the significance of Space and Technology in the developed nation.

He motivates younger generation through the example of his idol Dr. Vikram Sarabhai. And from live examples, how Dr. Sarabhai and his team launched satellite and create satellite vehicle launce programmer in Indian soil. And how space applications has become a part of our daily life and how it is changing the map of India in Global view.

“Learning gives creativity,

Creativity leads thinking,

Thinking provides knowledge,

Knowledge makes you great.”

                                                                                  _ Dr. A.P.J. Abdul Kalam

Apple Inc.: Simplicity is the ultimate sophistication

Apple Inc. is the world top renowned company. Thinks different, company’s punch line itself suggests about its innovation.  And credit goes to co-founder and company’s former CEO Steve Jobs. In period of Jobs when he was CEO, Apple has shown consistence performance beyond fashion, not only in company’s top line and bottom line figures, but mainly because of its innovative products, like, ipad and iphone. The true growth engine behind these innovations is Steve Jobs. Unfortunately, Mr. Think different is not with us today, but we as a people around the globe will never forget his passion and creativity about unique products.

October, 1983 when company introduced its first Macintosh computer, Jobs said, ‘People will fall in love with it.’ When we talk about Apple, usually we talk about its products. Why Apple’s product is so different? One can say because of simplicity in design and use, company identifies people needs and their wants, it also finds how people interact with computers. After finalizing these ingredients company heads towards design and technical achievement. Apple had not done great innovations only in products but in every smallest detail, like packaging and inventory management. Company has done modified tasks like separation of external devices and developed plug and ports.

Ipod, ipad, iphone and Mac computers are the major innovative products which company gave to the world. What is so unique about these products? These products are based on simplicity in design and use. Simplicity is the ultimate sophistication, like iphone and ipod touch, which has one button approach to function device. Ipod, which is specially developed for music lovers, is made up of double shot polycarbonate and transparent plastic materials. Apple prefers quality in material selection too; this is where innovation takes place in its initial steps.

Apple Inc. is not pioneered only in ‘iproducts’, along with that company have world’s amazing operating system, Macintosh OS, Which have unique features like multiple type face and proportionate fonts.  Latest which company had launched is ‘Lion X OS’, in 2011.

Apple uses same platform for ipod touch, iphone and ipad, by this strategy company is able to reduce cost and increases reliability. Apple works with employees and costumers too, company has given benefits to their employees. Customers’ benefits, product requires less repair, maintains and service. Company is lot more in customer involvement, like interacting with customers to experience design and development process.

Steve Jobs, man behind innovation. When Jobs was fired from its own company, in an interview he shared emotional experience, he said, ‘Getting fired from Apple was the best think ever happen to me.’ During that period Jobs found a company name Next, the target was the education system. Jobs found Pixar too, a world’s first animated studio. Jobs never hit limit button on innovation, in strategy and decision making. When he returned back to the company in August 1994, he went through lots of changes. He took brave decisions and applies real time experiments with distribution of products. He preferred to move into retail not only with physical present ‘bricks’, but through internet ‘clicks’ too.

‘Do what you love, keep looking forward and never settle down’ – Steve Jobs (1955 - 2011)

Volatile currency, INR

What is Depreciation?

As per accounting term depreciation means decrease in asset value. In case of currency (rupee) or real estate deprecation means the same, for e.g. rupee depreciate against dollar. In case of rupee and dollar, rupee value is decreased against dollar value in currency market (forex market). In simple language a currency will tend to become less valuable when its demand is less than supply.

If we understood definition, next question would be the reasons behind INR (Indian rupee) depreciation.

First Reason - Dollar is in Demand

BRIC countries like India have emerging economy, so a huge percentage of investment in India is from outside the country, especially from US but due to recession in US, big institutions are collapsing and many of them are on the verge of breakdown. They are suffering huge losses in their country. They have to maintain their balance sheets and look strong on all statements, so to recover losses in their country, they are pulling out their investments from India. Due to this pulling out of investment by these big companies from India or in other terms disinvestment, demand of dollar is raising up and rupee is depreciating.

Global slowdown and global investors’ preference US$ for safe investments, poor returns from Indian stock market (BSE Sensex lost close to 25% in 2011).

Second reason - Collapse of International Trade 

Importers are trying to accumulate dollars, as they have to pay in terms of dollars and at the end demand is increasing against the rupee. Exporters have a very few orders from outside countries, so there is no matter of converting dollar into rupee thereby decreasing demand for rupee.

If there is any deficit in the current account, which means country is doing more trading outside the country then its actual earning inside the country. This situation is not good for a country because the country needs to buy more foreign currency to fulfill its need inside the country. A country needs to manage its deficit within control; otherwise it will lead to an economic problem.

Depreciation in rupee is only beneficial to exporters, like IT industry, handicrafts, gems, jewelry, textiles, ready-made garments, industrial machinery, leather products, chemicals and related products. Because if $1=50 INR and dollar appreciate with 10% then rupee becomes 55 INR against $1. So, in this case where exporters get 50 INR in case of $1, now they earn 55 INR from $1.

But it inversely impact importers, like petroleum products, capital goods, chemicals, dyes, plastics, pharmaceuticals, iron and steel, uncut precious stones, fertilizers, pulp paper etc. The most impact which India gets from depreciating INR is from oil imports. Oil imports consume the largest part of the forex reserves. Take for instance crude oil imports. Brent crude oil price was $118.46 per barrel on April 2011 when exchange rate for the rupee was Rs 44.4 to a dollar. Oil price had gone down to $109.03 per barrel and exchange rate was Rs 52.7 to a dollar. Thus, because of the rupee depreciation not much benefit can be derived out of the lower oil price.

This effect is directly affected on balance of payment. And it results in high debt.

A depreciating rupee is not only impacting the import bill it has also affected the cost of borrowings for the corporate sector. Total external debt has increased by Rs.2186.8 billion for the period June 2011 to November 2011.

Even, Students going abroad for further studies and Indians going to foreign travel will be pinched hard due to his movement in rupee.

What was the role of RBI, dose it met expectations?

• ·         The Reserve Bank of India reduced trading limits for banks in the foreign exchange market.
• ·      The RBI deregulated non-resident external (NRE) rupee deposits and ordinary non-resident (NRO) accounts.

The reasons behind these steps are to support dollar inflow in Indian economy. By reducing barriers on Indian banks, RBI wants more inflow of dollars in country. If dollar supply will increase rupee value would appreciate.

Now, take a look on global exchange rate, country wise. Let’s start with China. Chinese Yuan is constantly appreciated in last year against USD, which means it is not satisfying Chinese exports any more. In July, 2011 Chinese trade balance was near about 30 billion Yuan, and in January, 2012 it was around 16 billion Yuan. If you can use same appreciation logic, you can easily get the reasons behind decrease in trade balance.

Japanese Yen, especially Japanese economy suffers a lot on Yen depreciation against dollar in 2011-12. After tsunami and Fucushima disaster Japan faces structural imbalances in economy. Yen also depreciate against USD in 2011, and Japanese trade balances ends with negative figure in January, 2012 from positive in mid 2010. 

“Finance is the art of passing currency from hand to hand until it finally disappears” – Robert W. Samoff

AA+ passing or failing perception?

The United States credit rating downgraded by Standard & Poor from AAA to AA+ on 5th August, 2011.

Who is Standard & Poor (S&P)?

S&P is a Credit rating agency (CRA), the company issues credit rating for the debt of public and private corporations. It have been designated a nationally recognize statically rating organization by the United States Security and Exchange Commission. It issues rating for both short-term and long-term credit rating.

Are Credit Ratings absolute measures of default probability?

Since there are future events and developments that cannot be foreseen, the assignment of credit ratings is not an exact science. For this reason, Standard & Poor’s ratings opinions are not intended as guarantees of credit quality or as exact measures of the probability that a particular issuer or particular debt issue will default.

The reasons for ratings adjustments vary, and may be broadly related to overall shifts in the economy or business environment or more narrowly focused on circumstances affecting a specific industry, entity, or individual debt issue.

The ratings are not buying, sell, or hold recommendations, or a measure of asset value. Nor are they intended to signal the suitability of an investment.

Primary reason for AA+ is political incapability to handle problems for more than 10 years. And Secondary reason is the rising public debt burden. In USA public debt is more than its GDP.

The U.S. debt-to-GDP ratio is at similar level to what Japan's was at in 2001 when it was downgraded from AAA to AA+ by S&P. Debt – to – GDP ratio is one of the indicator of the healthy economy. It is amount of national debt of a country as a percentage of its GDP. A low debt -to-GDP ratio shows that a large number of goods and services and profits are high enough to pay debt.

As per S&P report on US credit rating downgrade:

1) The downgrade reflects that the effectiveness, Stability and predictability of American policymaking and political Institutions have weakened at a time of ongoing fiscal and economic Challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.

2) We lowered our long-term rating on the U.S. because we believe that the prolonged controversy over raising the statutory debt limit.

3) Our lowering of the rating was prompted by our view on the rising public debt burden and our perception of greater policymaking uncertainty.

4) America's governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed.

S&P’s report also includes, the act calls for as much as $2.4 trillion of reductions in expenditure growth over the 10 years through 2021. These cuts will be implemented in two steps: the $917 billion agreed to initially, followed by an additional $1.5 trillion that the Congressional Joint Select Committee on Deficit Reduction is supposed to recommend by November 2011.

If the act implemented S&P still believes that debt burden will likely to grow. Under the S&P revised base case fiscal scenario, which they consider to be consistent with a 'AA+' long-term rating and a negative outlook, they now project that net general government debt would rise from an estimated 74% of GDP by the end of 2011 to 79% in 2015 and 85% by 2021.

In addition, it incorporates $950 billion of new revenues on the assumption that the 2001 and 2003 tax cuts for high earners lapse from 2013 onwards, as the Administration is advocating. In this scenario, they project that the net general government debt would rise from an estimated 74% of GDP by the end of 2011 to 77% in 2015 and to 78% by 2021.

If it is possible that interest rates could rise if investors re-price relative risks. As a result, our alternate scenario factors in a 50 basis point (bp)-75 bp rise in 10-year bond yields relative to the base and upside cases from 2013 onwards. In this scenario, we project the net public debt burden would rise from 74% of GDP in 2011 to 90% in 2015 and to 101% by 2021.

Lehman Brothers was rated AA few weeks before it collapsed in the same way American International Group (AIG) was rated AAA before it collapsed in September, 2008.

What I believe that AA+ was warning for USA to recheck its political instability and to reform tax system, health care, jobs etc. USA is a giant economy, it will not fail. Dollar is the safest currency in the world and still more than 14000 bonds are rated AAA by S&P. This (August, 2011) downgrade was like alarm bells for the Unites States of America.

Fuel Price Hike : Positive sign for Indian Oil Corporation

Crude oil is natural recourse. It may not be available in future. It’s nature’s gift. “We live in an environment, if we take certain action; the environment is going to turn against us.”

Indian Oil Corporation (IOC) has decided to increase its product prices. People said, “Government of India is very rude towards fuel prices. He is not able to control fuel prices. Oil companies are making huge profits.” But actually that’s not true.

Is it mandatory to increase fuel prices?

Yes, it is mandatory to increase fuel prices by oil companies. Indian Oil Corporation is losing Rs. 196 core per day on selling diesel, domestic LPG and kerosene at government controlled rates. “We are losing Rs. 18.11 per litre on diesel, Rs. 28.33 a litre on kerosene and Rs. 315.86 per 14.2-kg domestic LPG cylinder,” head of IOC said in an interview. While retail price of petrol is benchmarked at $98 per barrel of international rates, the same for diesel is at $72-73. India buys crude oil an averages $120 per barrel currently.

Now if we are saying that oil companies have huge profit margins then revise these figures, lose of Rs196 core everyday on selling diesel below its imported cost, Rs53 core on kerosene and Rs48 core on domestic LPG. Now I think that you can understand how it seems while making annual report.

Along with IOC, Hindustan Petroleum and Bharat Petroleum are losing Rs1, 77,562 cores in revenues on selling diesel. The situation in the current 2011-12 fiscal will be worse. In the 2010-11 fiscal, the three firms lost Rs78, 202 cores, but the government has provided only Rs20, 911 cores in compensation.

Dark clouds of under recovery are still likely to be set high for Indian Oil Corporation. They were estimated about Rs. 44,000 core in the first quarter. According to Centrum Research, total recover for 2011-12 would be about Rs. 97,000 core. That is higher than Rs. 78,000 core in 2011-10. Though, Government left with single option. Increase fuel prices to reduce overall under recovery.

Behind this incremental of fuel prices demand is equally responsible. IEA’s (International Energy Agency’s) recently forecasts estimate global crude oil demand to increase by 1.2 million bpd (barrel per day) in 2011-12 and 1.6 million bpd in 2012-13.

As we seen demand numbers I seems that the more we full our vehicle tanks the more demand will increase. Demand will increase and IOC will import more barrels of crude oil per day. And may be debt increases for Indian oil companies. And to meet that debt government will increase fuel prices.

If possible avoid extra expenses on your vehicle in terms of fuel.  Use public transport. Share your vehicle for mutual destination. By these small-small changes we could avoid high fuel prices in future.

Use renewable recourses. Save planet Earth.