Thursday, August 22, 2013

USD vs INR: Is this the top?

Ask any exporter, importer, analyst, currency expert or economics expert no one would have imagined 20% plus fall in Indian currency vs USD in matter of less than 4 months. INR depreciated from 53.80 levels on 1st May 2013 to 65.50 as on 22nd Aug 2013 a sharp fall of 21.7% in less than 4 months. 

Point taken that our currency is not alone in this fall and other emerging market currencies having high current account deficits fell sharply as well like Brazilian Real (BRL) is also down around 20% since 1st of May 2013 but the fall has been too much, particularly for INR, in very short span of time and the reversal is inevitable. Just consider the following facts:

1. Indian Economy is expected to grow by at least 5% in FY-14 and at least 6.0% in FY-15 vs U.S economy expected GDP growth rate of 2.6% in FY-14 and 2.8% in FY-15. In terms of growth rate difference India should continue to attract growth oriented capital from west from medium to long term perspective.

2. With all the monetary easing that happened in U.S since the crisis of 2008, the american economy has hardly witnessed any meaningful rise in inflation suggesting the ultra loose monetary policy to continue for longer than estimated, thereby helping asset classes and other currencies in general.

3. With INR at 65, the trade deficit and CAD will definitely moderate to extremely reasonable levels in 6 months due to higher exports and lower imports specially Oil and gold. With diesel under recoveries getting to almost nil zone in next 6 to 9 months the outlook for all the deficit numbers Fiscal, Current account and trade deficit will appear very encouraging in future standing at time frame 6 months forward.

4. The monsoon god has been very kind this time specially when other sectors are lagging. Agriculture sector is expected to lift India's GDP in current fiscal year by at least 0.3% vs prevoius year and help reduce food inflation as well which would be a big positive for India and it's currency playing out in next 6 months.

5. Last but not the least, govt. and RBI has been pushed to wall in this currency war and it would not be surprising if govt takes very strong measures to completely reverse the course which will lead to tsunami of dollars from all fronts leading to a massive appreciation in INR against USD.

Considering all the above factors we at InvestorZclub feel 65 - 66 is approximately the top and we should see an appreciation to around 60 levels in next 6 months. Even if INR depreciates beyond 66 it will be short lived.

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