The standard is poor

The S&P 500 might plunge even more due to Europe’s debt crisis.

Read Article...

User

Jumping on the electric wagon

 

There’s a lot riding on Tesla, which has a reputation for building sleek, well-made electric vehicles.

Read Article...
 

 

User

“Rescue packages are like a contagious disease”

Abhishek Goenka, CEO of India Forex Advisors, a foreign exchange consulting company, speaks to Moneylife’s Sanket Dhanorkar about his assessment of the euro bailout package, the impact on the rupee and the growth in the currency futures market

Moneylife (ML): How do you see the current scenario in the global currency markets? Given the euro’s difficulties, how would it impact global currencies?
Abhishek Goenka (AG):
Because of the problems in the eurozone, we have seen around a 10%-15 % fall in the euro. This has impacted other countries like the UK also. Despite this fact, in the case of dollar-rupee, we have not seen significant corrections in the inflows into India. However, this seems to be on the cards, which could show us (some) weakness in the near-term. Foreign investors are likely to pull out money from the emerging markets due to the liquidity crunch overseas. This will have a weakening effect on the rupee. The process of weakening has also started in other Asian currencies. The yen has remained largely range-bound. Also, expectations of an appreciation in the Chinese yuan have dipped as their exports will get hit in the current scenario. We believe the euro will weaken further to around 1.20 levels and below. Overall, Asian currencies will continue to be weak.

ML: What products are being sold by banks currently? Have exotic instruments disappeared or still existing in some other form?
AG:
Most of the structured products, which were being offered by the banks, have kind of stopped. Largely because most of these corporates had burnt their fingers in 2008-09 and also because there have been cases of default and erosion of net-worth in some cases.  Moreover, people don’t want to make fresh calls in the market currently due to global imbalances. Banks also want the management to first understand the product and then sell these products. There are very limited products being offered now—like plain vanilla range forward products or a zero-cost option where there is not much leverage. Only very large corporates are entering into structured products. Smaller companies are not entering into such deals.

The Reserve Bank of India (RBI) is considering barring such small companies from entering into exotic derivatives contracts. They will put certain stipulations in terms of net-worth and overall exposures. So now, only the bigger corporates will be allowed to enter into exotic instruments where the level of understanding and risk appetite is there. Banks are also not very aggressive in selling these kinds of products for mid-sized companies. It will take some time for interest to come back from both banks and corporates. So I think this is a good move by the RBI because totally stopping the entire derivatives products is no solution. Financial markets are all about evolution. Companies that are making money or reducing costs from such instruments have a team that understands these structures completely and the purpose is generally hedging. But the case with some SMEs and smaller companies is that they do not have experts to manage their treasury. They normally move according to the herd. If others are parking money in some instruments, they will also enter the product without understanding the risk. So it is makes sense to allow only those companies into such structures that understand the risk, have proper risk management practices and whose valuation allows them to take a slight hit without impacting their net-worth.

ML: What is required in terms of regulations and transparency for the currency derivatives segment?
AG:
There could be a compulsion to have risk management policies for every company that has foreign exchange exposures and want to take even a simple forward contract. This will ensure that everybody knows what they are doing and understand the maximum downside risk. The government could also think of designing a comprehensive test structure where only a qualified treasury team would be authorised to transact with the bank. The RBI could also stress on documentation i.e., if you are entering into a forward contract, they could check if you have the supporting documents to back your transactions. They could also have stronger audits in place for banks selling such products. In this way, the RBI can be updated on mark-to-market losses in the client’s books and any improper contracts can be controlled and tracked.

ML: What are the current trends in the currency markets segment?
AG:
The currency futures market has picked up tremendously in the past year or so. In fact, in the years to come it might cross the overall over-the-counter (OTC) derivatives market in India. It has already crossed around Rs35,000 crore-Rs40,000 crore  in terms of volumes. So many of our clients are showing interest in currency markets both for hedging and trading purposes. There are also cases of arbitrage at times between the currency futures and OTC forwards market, which has increased the overall interest. Currency has always been a bigger market than equities and commodities. We have seen a significant increase in currency exposure in India. In fact, pretty soon we will see total volumes in the currency market exceeding that of the equity markets in India.

ML: RBI has allowed options trading in the currency futures market. What is your opinion on this move?
AG:
Going by the past history I don’t think options trading will take much time to catch up. What is definitely required though is that the tenure of the contract should be increased from three months to six or eight months. Because, if suppose in the OTC market, you have an exposure in December, you can book a contract there. You cannot take similar exposures in the currency futures market. Training needs to be imparted and certification courses should cover the subject in details.{break}

ML: What is your advice for retail investors wanting to participate in currency markets?
AG:
Whether it is sponsoring education abroad, medical expenses or travelling abroad, retail participants have a great opportunity in this market in terms of hedging as well as for trading purposes. The more participation we see in the currency market, the liquidity improves and we have better price discovery. Earlier the arbitrage between the currency futures and OTC forward markets used to be as high as 20 paisa. Now it has come down to just 3-4 paisa. The best part is that the market is totally transparent.

My advice to retail participants is, one should read before investing instead of pumping all your money into the markets. You could probably set aside 10%-20% of your portfolio for currency exposure. Start with a small kitty; otherwise the confidence will get broken with the first loss. Track the movements very closely as also the political and economic factors affecting the movement. You should read the research reports published on various sources to get an understanding. Slowly, over a period of 3-6 months, you will be well-equipped to deal with the currency market. Education should be a continuous process. If you are really passionate and treat it like a business, there is no reason why you should not make money.

ML: What would be the ramifications if more institutions like Goldman Sachs are found out?
AG:
If anything as big as this happens, which involves a 100-150 year old bank or institution; there will be a definite risk aversion in the markets. Liquidity will get sucked out as the confidence goes down. Bond spreads will go drastically higher and yields will go up. The dollar will get very strong. There will be a bout of risk aversion, which will cause commodities to go down. The currencies will take a hit—which includes the emerging markets also. What will go up is only gold and the dollar. I will not be shocked if in the coming 2-3 months we see such kind of news with some (other) big institution coming up again. I don’t think the entire story has come out yet. There is a possibility that things might get out of control. At that time the ramifications will be huge. If the problems in Europe intensify, a lot of Ponzi schemes like Bernard Madoff’s will go bust. The overall sentiment would be hurt very badly. The timing of Goldman Sachs’ problem was not as bad as it is today. If such a thing were to happen in today’s scenario, the markets would have reacted very badly as sentiments are very poor. At that time, sentiments were neutral.

ML: What is your sense regarding the impact of the bailout package?
AG:
We have to get into the details of the rescue package—the size and scope of bond purchases by the European Central Bank (ECB). It has to be approved 100% in-principle by all the countries, which has not yet happened. The implementation process should also be fast and Greece should accept all the terms. The problem may worsen till the time it is implemented. That’s the reason why after the announcement we saw these currencies moving up but (they) ultimately fell with a bang. The rescue package has not given that much confidence to the market.

ML: Is it wise to introduce such huge bailout packages or should countries be allowed to take a hit?
AG:
Earlier, we have seen that rescue packages have only delayed the problem, they have never ended it. It is like a contagious disease. If you let everybody get afflicted by it, you will have a global reaction. So a rescue package should be designed in a way that the country can be bailed out over a period of time with penal interest. The norms of the bailout should not be very relaxed; otherwise it might become a habit. For instance, if in India, you keep bailing out farmers, they will never repay loans. Ultimately, it is the taxpayers’ money. Why should the taxpayer suffer for it? While creating the eurozone, the terms stated that the fiscal deficit should be limited to 3% of the gross domestic product (GDP). Everybody has flouted the norms, including Germany and Italy. So when you have such norms, you should stick to them. Countries that cannot do so should take a hit and be penalised.

ML: How do you think the competition among stock exchanges in this segment is playing out?
AG:
We have witnessed an enormous increase in volumes in the past year or so. Any exchange, which is able to get the maximum share, will benefit a lot. That is why there is such intense competition. When NSE came to prominence, BSE took a step back. Now, the MCX and NSE are trying to fight each other for the pie. It has a lot to do with the first-mover advantage. The more popular an exchange, the more liquid it is and more members will get attracted to it. It is also a game of valuation. The exchanges have to show a good valuation if they are to attract investments from abroad.

ML: What are your expectations regarding the short-term and medium-term movements in the dollar-rupee rate?
AG:
In the short-term (2-3 weeks), the rupee will move to about 46 levels. In the medium-term (2-4 months), I still feel the rupee will remain weak. I would expect it touch around 47 levels because if it maintains about 45.50, then it will enter into a temporary bearish phase. This is a level, which is a long-term downward trend line. Such trend lines don’t break so easily. The Elliott wave analysis shows that a medium-term bottom has been made at around 44.10 A-B-C correction of the rise from Rs39-Rs52. Please also note 44.10 is the 61.8% retracement of the rally from Rs39 to Rs52. So, one should not book exports for long-term. One should not be taking a call of more than three months. The downside in the rupee is clearly open till Rs47.20. We might see decent corrections in stock markets also, which would weaken the rupee further.

User

We are listening!

Solve the equation and enter in the Captcha field.
  Loading...
Close

To continue


Please
Sign Up or Sign In
with

Email
Close

To continue


Please
Sign Up or Sign In
with

Email

BUY NOW

The Scam
24 Year Of The Scam: The Perennial Bestseller, reads like a Thriller!
Moneylife Magazine
Fiercely independent and pro-consumer information on personal finance
Stockletters in 3 Flavours
Outstanding research that beats mutual funds year after year
MAS: Complete Online Financial Advisory
(Includes Moneylife Magazine and Lion Stockletter)