The fate of the Indian Rupee currency – Does it signal a steep economic downturn for the country?

In a news article published on June 06, 2013, it was reported that the Indian Rupee currency fell to approximately 57.0 per dollar, and is now one of the weakest Asian currencies to date. This comes after The Reserve Bank of India (RBI) cut the benchmark repurchase rate by approximately 25.0 basis points (bps) on May 03, 2013 to 7.25 percent, extending year-to-date (YTD) decline to 75.0 bps. Inflation as measured by the GDP Price Deflator fell to a 41-month low in April. The next RBI review is scheduled for June 17, 2013. According to the news article published on June 07, 2013, India’s gross domestic product (GDP) grew by approximately 5.0 percent for the fiscal year ending March 31, which is below the 10-year average of approximately 8.0 percent. This is compared to China’s average GDP growth for 2012, which stood at approximately 7.8 percent to 8.0 percent. The official stock market index, the Sensex trading in Mumbai, has declined by approximately 3.8 percent since its peak in 2011 on May 17, paring its annual advance to 0.5 percent. The index’s Price-to-Earnings (P/E) growth is approximately 13.4 times, one of the cheapest since May 01, as compared to the MSCI Emerging Market of 10.0 times.

The decline in the value of the Indian Rupee comes on the heels of the revised forecast for India’s overall Gross Domestic Product (GDP) growth issued by the International Monetary Fund (IMF) to be approximately 5.0%. The IMF has cited concerns regarding India’s overall current account deficit, which was impacted by the surge in gold and oil imports and weak export growth. With the decline in the price of gold seen since April 2013, the current account deficit does not bode well in terms of boosting its overall GDP growth for this year.

One of the issues that might have impacted India’s growth is its less than robust growth of the foreign direct investments (FDI) due to the increase in bureaucratic red tape and uncertain regulation, particularly in the telecommunications industry, where one of the Ministers in charge of the Telecommunications portfolio was sacked by the Government due to government impropriety. I believe that in order to resolve these issues of red tape and bureaucracy, it is important for Indian lawmakers to create a hospitable investment climate for foreign investors. In a news article published on April 30, 2013, it was reported that one of the global multinational firms, Unilever, plans to spend approximately USD 5.4 billion to raise its stake in its Indian subsidiary, Hindustan Unilever. Hindustan Unilever is one of India’s largest fast-moving consumer goods (FMCG) distributors ranging from its Dove brand soaps and Lipton Tea Brands. This is contrast with other multinationals, such as Procter and Gamble (P&G) which have been shedding jobs, while French multinational, Danone is still relatively exposed among the big food groups to the ongoing Euro-zone crisis.

The prime minister, Mahoman Singh is busy fighting graft and corruption in his government, but is hampered by the various factions within the Indian Parliament, and domestic issues such as terrorism, security, and ensuring safety of its citizens and foreigners especially after the brutal rape and murder of one of the Indian female medical students on a New Delhi bus earlier in this year. Nevertheless despite the various issues, Prime Minister Singh is busy courting foreign governments and investors to keep up the pace of FDI in his country, for example in early May 2013, he led a delegation of businessmen and ministers to Japan to seek for FDI opportunities in India, and I believe that India is going on out to attract foreign investors. One of the main concerns lately other than the common bureaucratic issues has been the lack of awareness among Indian male citizens on the importance on the protection and safety of foreigners, especially with various reports or rape and murder of foreign tourists. The Indian Government and the police authorities have vowed to crack down on the perpetrators, but the process has been quite slow as both are still dealing with the aftermath of the rape incident and murder of the female medical student in early 2013. There is quite a severe level of blame and scepticism by the overall public on the reputation and integrity on the overall justice system in India.

In terms of instituting capital controls particularly in the sale of gold, analysts such as Societe Generale strategist, Wee-Khoon Chon, have expressed mild optimism on the long-term impact of such a move. It was reported in a news article dated June 06, 2013, that India has instituted an import duty increase on gold to 8.0 percent from 6.0 percent in order to resolve its current account deficit. This move comes at the time when the World Gold Council has predicted record quarterly demand for the metal in the country.

Overall, I believe that India still has ways to go before climbing out of its current downturn woes. It is important to keep in mind that India is still part of the BRIC nations (Brazil, Russia, India, and China), and there is huge amount of human talent that local small and medium-sized enterprises and foreign multinationals can tap into. The Indian Government should also be focusing on the development of IT infrastructure, and services. Prominent Indian companies such as the Tata Group, and Infosys have expanded their operations abroad. The Indian Government might perhaps want to look into relaxing the repatriation of profits so that it will continue to thrive alongside with the local and foreign multinational corporations in charting the new course for India’s economic growth and sustainability in the future.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc