The heading of my blog seems incoherent. But let me explain. I have just returned from a holiday to Turkey. And towards the end of my visit my ATM withdrawals had become expensive. The Rupee had depreciated by 10%. Yes. When I left India I had bought dollars at Rs55.20. My last withdrawal at Selcuk, Turkey was exchanged at Rs 60.03.
Though the currency markets show the USD/INR at 59.85 as I write, at the retail level the rates for buy and sell are different. This was a sell rate given. Buy was close to 57.50. The difference between buy and sell is the profit of money changer or his spread.
The crash of the Rupee has implications for Indian stock investors, for businesses which import items. It has implications for our oil bill and most of all for the current account deficit(CAD). A burgeoning CAD spells doom for the economic health of the nation and in an election year, the government will not be in a mood to tighten its belt, it may go for popular schemes thus further increasing the gap. To hell with prudence, that will be the problem of the next guy. Sarkari organisations are like that only. The world over. We are just a few steps ahead.
How does the govt control the deficit? The government requires equity and FII flows as one measure to control CAD. Restricting gold imports is a measure, reducing oil imports is another. Cutting expenses is another but none of this will happen. Govt should ideally cut its expenditure but that will never happen since the government does not spend its sweat or energy to earn the money, it only collects taxes and revenue and then spends it. You as an individual will cut corners to pay loans, reduce expenses to repay credit card outstandings etc because you earn with effort and then you spend. . Govts don’t do that. So, there is nothing in the near future to say that our CAD will be under control. On top of that Bernanke Uncle has said that QE are going to stop. Fantastic. Another hole in Mr Chidambaram’s perforated umbrella.
What is the prognosis?
- Companies with high import bills, the cost of which cannot be passed to consumer will further have reduced profits in FY14.
- FIIs will pull out money, making stocks cheaper and sensex will crash some more.
- Increase in subsidy bill of government of oil and fertilizers. If govt decides to increase cost of petrol and diesel than your bill increases.
- Inflation is unlikely to come under control.
- RBI will do no further rate cuts.
- A temporary liquidity crisis in the world, easy money will not be available.
- Once markets crash, the same FIIs will return to India and then drive the sensex up.
- Export oriented sectors and businesses will have a bonanza.
- Foreign travel for Indians will be costly.
- Education abroad for your kids will become costlier.
So what should you do?
Keep buying into a crashing market. Either through Mutual Funds or directly. Buy businesses which are debt free, do not depend on imports and are dependent on Indian consumer, are there any mobile hand set manufacturing companies listed? I have ten mobile hand sets in my home of four people. Six redundant models. Because CAD or no CAD, Indians do not stop consuming.
Tesekkür Ederim and Tanri Sizi Korusun !