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Nifty, Sensex to head higher – Weekly closing report
Nifty may head towards 8,700 as long it stays above 8,400
We had mentioned in the previous week’s closing report that NSE’s CNX Nifty and S&P BSE Sensex may head lower and a fall below 8,400 in Nifty would lead to a decline. The Indian stock market started falling from Monday onwards and for the next two days, recorded steep losses. Nifty hit a low of 8,337 during the week. However, on Friday, the benchmark indices rebounded sharply and erased a large part of the losses. On a weekly basis, the market indices recorded minor losses and is set to resume its uptrend.
On Monday, the market was higher in the morning the initial gains were wiped-out, as investors became anxious over the upcoming key economic data points of Consumer Price Inflation (CPI) and Index of Industrial Production (IIP). Analysts added that the markets were upset over the logjam in the Parliament. The monsoon session of the Parliament ends on 13th August with the fate of key legislations like the GST (goods and services) or the Land bill hanging in the balance.
A sudden devaluation of the Chinese yuan dampened investor sentiments on Tuesday leading to S&P BSE Sensex closing 235 points in the red. The wider 50-scrip Nifty of the NSE closed lower by 63.25 points or 0.74% at 8,462.35 points. China's central bank devalued the yuan by 2%. This was the biggest devaluation in the Chinese currency since 1994. The move has strengthened the US dollar value, which has negatively impacted major world currencies including the Indian rupee.
On Wednesday, the negative global and local cues just ahead of the release of key economic data points unnerved investors, forcing the 30-stock Sensex to plunge 354 points in the day's trade. The wider 50-scrip Nifty also closed deep in the red. It ended 113 points or 1.33% down at 8,349.45 points. 
The Indian equity markets closed flat on Thursday, as the initial gains made on the back of positive macro-economic data diminished on account of the government's inability to pass key economic legislations on the last day of the monsoon session. Nevertheless, after three days of continued losses, Sensex closed 37 points up. The index had lost a total of 724 points during the first three trading days of the week. Investors were seen hopeful of a rate-cut based on healthy macro-economic data points which were released late on Wednesday. The macro-economic data points showed a fall in India's annual retail inflation rate to 3.78% in July and a rise in the factory output to 3.8% in June. There were however, negative cues such as the impasse over GST Bill, and devaluation of the Chinese yuan coupled with a depreciating rupee to influence investor sentiments. 
On Friday, the Indian stock market was on a tear from the morning, with hopes of a rate cut sometime soon. We expect the indices to continue to rally over next week.
Out of the 27 main sectors tracked by Moneylife, top five and the bottom five sectors for this week were:


Rupee v/s US dollar: When 65 is not equal to 65!
While the rupee has hit 65 to the US dollar again after two years, Indian rupee has been a stronger currency in the last 16 months than in the previous four years
Whatever China does attracts attention - big attention. So when China suddenly decided to move the Yuan downwards against the US dollar, currency markets panicked. Indian Rupee could not have been left untouched and has reacted from around 63.7 per US dollar to around 65 per US dollar, a level not seen since September 2013. That was the time when the Rupee market was in complete panic and had even touched 68 to a dollar.
So are we into that panic mode again? Not exactly. Just as a recap, what was the scenario in September 2013? India’s current account deficit (CAD) had gone haywire (about 4-5% of GDP). External debt was a concern. Inflation was in double digits or very close. Dependence on foreign inflows just to maintain equilibrium in the forex markets was very high.
All it took was a comment from US Fed on the continuity/size of Quantitative Easing and rupee collapsed like a pack of cards from 53-odd levels to around 68 at the worst, before it settled back in the 60-65 range. Indian Rupee was a weak currency. And thus had to adjust. Just to get a sense of the weakness, let us have a look at some charts and comparisons.

Chart 1 


Chart 2

Chart 1 gives a comparative sense of how currencies fared in the four year timeframe from April 2010 to March 2014. Very clearly, Indian Rupee was one of the worst performers in the Emerging Market. Chart 2 gives the Dollar Index, which basically measures the strength or weakness of the US Dollar against an index of major global currencies like Euro/Yen etc.
Higher the index, stronger the Dollar
In the same four year timeframe from April 2010 to March 2014, as can be seen, the US dollar neither strengthened or weakened in any major way against the major currencies.
Therefore, Indian Rupee weakened badly against the US dollar, when the American currency itself was not exactly strong. In addition, Indian rupee was one of the worst performers amongst the emerging market currencies and by a big margin.
Both would suggest that the Indian Rupee had problems of its own rather any external factors. If it were a global issue, it should have affected most currencies, which was clearly not the case.
And those India-specific issues were inflation or CAD as mentioned before. That was, in short, the situation the last time we saw the rupee at 65 per US dollar in the currency markets.
Now, let us come to today’s numbers. Inflation is single digit. CAD is well under control (0%-1% of GDP), unlike 4%-5% two years back.
On the Forex Reserves front, things are far better off, but accounting for the external debt, I would think, it is pretty much a similar situation, with a positive bias. Given that CAD is very close to zero, dependence on foreign inflows to maintain equilibrium is far less.
Thus, logically, the Indian Rupee should be a far more stable currency than in the previous four-year time frame that we discussed before. So what do the same charts and comparisons say?

Chart 3


Referring to Chart 3, it can be seen that in the 16 months from April 2014 to July 2015, the Indian rupee is one of the top performers amongst the same emerging market currencies group. (Same group, where it was one of the worst before.)
If one refers back to Chart 2, which is the Dollar Index, the US dollar has actually strengthened from around 80-odd levels to around 96. That means that US dollar has strengthened around 18%-20% in the same 16 months. As Chart 3 suggests, Indian rupee weakened by only about 6%-7% against US dollar, when its strength, as measured by the Dollar Index, was of the of the order of 18%-20%.
Thus, the Indian rupee has held on to its value significantly in these 16 months than in the previous four years.
In fact, some people were also of the opinion that the Indian rupee should have depreciated a little more in these 16 months to maintain export competitiveness. But, all said, it was broadly a stable currency.
Then in August, something happened....and the Indian rupee hit 65 per US dollar on the currency screens. That something was nothing but the Chinese move to devalue their currency Yuan against the US dollar. 
Given China's size and importance in global trade, a currency move by that country has an impact on the competitiveness of others who are competing with it, but are clearly not of the same size. 
So when China devalues its currency, which in turn, makes its exports little more competitive, it has the potential to hurt other countries' exporters. (Keep in mind also that Yuan had actually appreciated by about 9%-10% against US dollar in the past five years. It can be checked in Chart 1 and Chart 3)
The currencies of other exporters will react and depreciate their currency and improve their competitiveness. This is what has happened to many currencies and the Indian rupee can hardly be aloof when the "Big Daddy" has made its move. Not surprisingly, 65 per US dollar got printed on the currency screens.
So, this is not a panic situation as in 2013. Not yet. Indian Rupee is not alone in a world of depreciation. In fact, if it is a race to the bottom amongst competing currencies, Indian rupee has no option but to participate.
That is why today’s 65 to the dollar is not equal to that 65 of 2013 August!
(Disclaimer: I am no expert on the subject, this is just an attempt at giving a perspective in layman terms, as much as possible. If you find something has gone wrong or missing, please do give feedback)



Ralph Rau

1 year ago

The Indian inflation rate is consistently 400 basis points over the US inflation rate.

So INR eventually will devalue by 4% per annum.

This does not happen uniformly but instead happens in sudden cumulative falls every few years. This is the only way to retain trade competitiveness.

Anil Agashe

1 year ago

How do you say CAD is close to zero? Are you considering invisibles also?

Pravesh Pandya

1 year ago

Concepts in economy or finance are easy to understand if explained well. MSM does a bad job in explaining such things.

Thanks to Moneylife that we understand the cause/effect well in world of finance.

Consider this. A few years ago Moneylife pointed that gold price was a function of exchange rate and international gold price. When this was explained this made complete sense and felt like how could someone miss it.

Years have passed but every day the daily tick of gold follows this rule, but the MSM attributes any price rise in gold to jewellers buying for festive season. If MSM has its way its festive season every other month.


Pravesh Pandya

In Reply to Pravesh Pandya 1 year ago

To add to above point also consider Chaman Lal Setia recommended by Moneylife multiple times. Main focus was exports and how it would benefit. Look at how it rises whenever rupee weakens.

Raghvendra Kedia

1 year ago

A great read. Coincidently I read it on August 15th and a got a feel good factor.

Very insightful article.

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