Thursday, March 27, 2025

Will the Wild Ride for the Rupee Continue?

 The recent depreciation of the rupee has sparked a debate on the relative merits and drawbacks of the fall in value vis-à-vis the US dollar. The recent volatility has been sparked by US President Donald Trump’s tariff policies that have increased uncertainty around the world and have led to a fall in the value of many currencies, not just the rupee.

Consider this: the rupee fell by 57 paise to 86.62 on January 28, 2025-the steepest decline in nearly two years. From just February 10 to 13, the rupee quoted between 86.50 and 88.

In this period, some have questioned the Reserve Bank of India’s (RBI’s) handling of the situation, raising concerns about its decision to sell dollars to shore up the currency. The debate has also included top ministers in the Prime Minster Narendra Modi-led National Democratic Alliance government.

“Depreciation is a bad thing. We believe that in the long run, we must focus on a stronger currency because we are still an import-dependent country,” Union Commerce and Industry Minister Piyush Goyal said at the India Today-Business Today Budget Round Table 2025.

That said, Goyal added that the rupee has performed better than most emerging market peers. “The rupee is one of the best-performing currencies among emerging market economies. Our depreciation is roughly half in terms of percentage-we are about 2.8–3% compared to 5.5–6% that most other competing economies have seen,” he pointed out.

This tells us something about the attitude to the rupee’s depreciation-it is a touchy subject.

But Reserve Bank of India (RBI) Governor Sanjay Malhotra, who took charge at Mint Road last December, made clear it after the Monetary Policy Committee’s deliberation that “Our stated objective is to maintain orderliness and stability, without compromising market efficiency”. Accordingly, the central bank’s interventions in the forex market focus on smoothening excessive and disruptive volatility rather than targeting any specific exchange rate level or band. “The exchange rate of the rupee is determined by market forces,” he said.

RBI Under the scanner
 

  • However, the RBI’s stated policy, reiterated by new governor Sanjay Malhotra, is that it does not target a specific rate
  • The RBI sold a speculated $70 billion in December 2024 to defend the rupee when it came under intense pressure
  • The central bank has said it intervened to ensure that movement is orderly and there’s no excessive volatility
  • Some observers have said that the RBI’s dollar sales led to a tightening in liquidity conditions in India
  • But considering the uncertainty sparked by us president Donald Trump’s policy, the rupee is expected to feel pressure

Some Comfort

Besides, there are silver linings even with a weaker rupee: the current account deficit (CAD) moderated to $11.2 billion (1.2% of GDP) in the second quarter of FY25 from $11.3 billion (1.3% of GDP) in Q2FY24. The World Bank says India remains the largest recipient of remittances globally in FY24, with an estimated inflow of $129.1 billion. The CAD for this year is expected to remain well within the sustainable level. As at end-January 2025, foreign exchange reserves stood at $630.6 billion, an import cover of over 10 months or 99% of the external debt. And around two-thirds of foreign currency loans were hedged.

Yet, in December, when the rupee came under pressure, the spotlight was on the central bank’s foreign exchange sales to stem the slide. A view gained currency that the RBI should have let it slide and not have sold a speculated $70 billion. After all, the new US President’s world view was something that had to be dealt with. Then again, it has been the central bank’s long held view that it does not target a specific level for the rupee. So why defend the rupee by blowing precious forex?

Of course, there was a counter view that having linked the rupee’s value to national pride, could the RBI have let the rupee find its level? After all, the rupee has moved to its current level from around 63 to the dollar a decade ago. And if this, indeed, was to be the case, it would have meant higher imported inflation, which in turn, would have delayed repo rate cuts. The logic was simple: you can’t have a weaker rupee and lower interest rates.
 

The Liquidity Crunch

The RBI’s dollar sales also brought another talking point into the picture: that it led to a tightening in rupee liquidity. This is not entirely true.

After remaining in surplus from July to November 2024, system liquidity-as measured by the average net position under the liquidity adjustment facility (LAF)-turned into deficit during December 2024 and January 2025. This is mainly attributed to advance tax payments in December 2024, capital outflows, forex operations, and a significant pickup in currency in circulation this January.

It is also misleading to pin the drainage of liquidity solely on the central bank’s dollar sales-every dollar sold sucks out an equivalent amount in rupees, and vice-versa. And the RBI Annual Report (FY25) details the developments that lead to the squeeze. Surplus liquidity moderated from August 12, 2023, following the imposition of the incremental-cash reserve ratio (I-CRR), a monetary policy tool to manage liquidity in the system, which resulted in around Rs 1.1 lakh crore moving out from the banking system. Then, the build-up of government cash balances due to advance tax collections and GST payments further tightened liquidity conditions. The average net liquidity adjustment facility slipped into deficit in September for the first time since May 2019.

Consequently, the average net LAF absorption moderated to Rs 89,000 crore in Q2FY24 from Rs 1.26 lakh crore in Q1. Liquidity turned into deficit with average net LAF injection of Rs 76,000 crore in Q3, driven by festival related currency outgo in October-November and build-up of government cash balances due to advance tax and GST payments in December 2023. Net LAF injection averaged Rs 1.36 lakh crore in Q4, with injections narrowing considerably in March 2024 from January-February.

Then the return-leg of the dollar-rupee sell-buy swap auction for $5 billion on March 8, 2022, also injected liquidity of Rs 42,800 crore on March 11, 2024. In Q4, the central bank injected liquidity through six main and 19 fine-tuning variable rate repo operations.

 

What now?

The bigger picture is as follows: the rupee will continue to gyrate. If the war between Russia and Ukraine ends, and sanctions are lifted on Russia, that may lead to the end of cheap oil supplies from that country months down the line. Will that show up in higher oil price-linked inflation and impact interest rates movements? That needs to be watched closely.

The RBI’s recent decision to cut the policy repo rate by 25 basis point to 6.25%—the first in five years—has not led to lending rate cuts by banks as their cost of funds will take time to go down. Higher provisioning for bad loans in some sectors, especially in unsecured retail credit means the headroom for lending rate cuts is narrower. Plus, the growth in deposits has just about managed to keep up with credit growth with the credit-deposit ratio of banks easing off 80 thereabouts. If, as a result of the repo rate cut, bank deposits were also to fall, then the CD ratio gets affected more. Besides, as stated earlier, the rate cut and the rupee’s depreciation cannot go together. When a currency is on the slide, it becomes costlier to buy the dollar. And the dollar does not get cheaper when interest rates are cut.

 

So, what is in store for the rupee?

The RBI may go easy on the rupee and give priority to domestic issues like other central banks. The fuss over the rupee’s level should end. 

Business Today

Tuesday, October 15, 2024

Put-Call ratio

 Put-Call ratio (PCR) indicates the mood of the market.


The increasing PCR, or being higher than 0.7 or surpassing 1, means traders are selling more Put options than Call options, which generally indicates the firming up of a bullish sentiment in the market. If the ratio falls below 0.7 or moves towards 0.5, then it indicates selling in Calls is higher than selling in Puts, reflecting a bearish mood in the market.


VIX - the fear indicator

 The India VIX, the fear indicator

Retail investors in stock market as per Economic Survey 2023-24

 Over the last few years, the Indian capital markets have seen a surge in retail activity through direct trading in markets through their accounts and indirect trading through mutual fund channels.

According to Economic Survey 2023-24, retail investors' share in the equity cash segment turnover was at 35.9% in 2023-24 (FY24). The number of demat accounts with both the depositories rose to 1,514 lakh in FY24 from 1,145 lakh in FY23.

The impact of this influx of the investors in the market is also reflected in new investor registrations with the exchanges, their share in total traded value, net investments, and ownership in the listed companies.

The registered investor base at NSE has nearly tripled from March 2020 to 9.2 crore as of March 31, 2024, potentially translating into 20% of the Indian households now channelling their household savings into financial markets.

"The significant increase in retail investors in the stock market calls for careful consideration. This is crucial because the possibility of overconfidence leading to speculation and the expectation of even greater returns, which might not align with the real market conditions, is a serious concern," said the document tabled by Finance Minister Nirmala Sitharaman in Parliament.

The survey noted that a rise in retail participation was more substantial and steadier through the indirect channel — mutual funds. The FY24 has been a spectacular year for mutual funds as their Assets Under Management (AUM) increased by ₹14 lakh crore or 35% year-over-year to ₹53.4 lakh crore at the end of FY24, boosted by mark-to-market (MTM) gains and expansion of the industry.

The total number of folios increased to 17.8 crore at the end of FY24 from 14.6 crore at FY23-end.

Some of the factors that facilitated the entry of investors included seamless technological integration, government measures towards financial inclusion, growth of digital infrastructure, rapid smartphone penetration, a rise of low-cost brokerages, the pursuit of generating income from alternative sources and lower returns generated by traditional asset classes such as real estate and gold.

The survey said that the enhanced participation of retail investors in the Indian capital market is hugely welcome and lends stability to the capital market. Also, it has enabled retail investors to earn higher returns on their savings.

Noting the interest of retail investors in the derivative market, the survey said," the derivatives are hedging instruments, they are mostly used as speculative instruments by investors worldwide. India is likely no exception".

"Derivatives trading holds the potential for outsized gains. Thus, it caters to humans' gambling instincts and can augment income if profitable. These considerations are likely driving active retail participation in derivatives trading," the Survey said.

The survey calls for raising investor awareness and continuous financial education to warn them of the low or negative expected returns from derivatives trading.

It, further, said that a significant stock correction could see losses that are more considerable for retail investors participating in capital markets through derivatives.

"Investors’ behavioural response would be to feel 'cheated' by unseen more considerable forces. They may not return to capital markets for a long time. That is a loss to them and the economy," it added.


The Economic Survey 2023-24 on July 22 cautioned against significant increase in retail participation in the stock market, saying expectation of higher returns without real market conditions is a matter of concern.
The Survey also mentioned that enhanced participation of retail investors lends stability to the capital market and noted the increasing interest of these investors in the derivative trading.



Source: The Hindu 

OFS in an IPO - a double-edged sword



An OFS in an IPO is seen as a double-edged sword, where on one
hand, it provides an opportunity for existing shareholders to cash in on the
early investments. On the other hand, it doesn't bring any new funds to the
company for strategic growth initiatives, unlike a fresh equity sale that could
be used to fund growth opportunities.

Monday, October 7, 2024

A Decade of Make in India

 



An uptick in manufacturing activity a decade since the launch of the Make in India initiative notwithstanding, India's integration with global value chains faces some challenges.

Global value chain (GVO-related rade, a measure of a country's participation in the multi-stage trade process, accounts for more than half of the gross trade in India's manufacturing sector. And despite an uptick in the ratio in other sectors as well, India's total GVC-related trade lags behind Vietnam and Russia (Charts 1, 2).

One of the stated objectives of the Make in india initiative was to boost manufacturing activity and improve investments in the sector. Manufacturing contributes less than a fifth of india's gross domestic product, a ratio that has remained unchanged since 2013-14. In the decade ending in 2022, India's manufacturing output per capita grew at a compound annual growth rate of 5 per cent.

However, Bangladesh, Vietnam, and China grew at a faster pace (Chort 3). But manufacturing activity, which has picked up after the pandemic, remains robust compared to many peers from the Brics (Brazil, Russia, China, and South Africa) grouping (Chort 4). The initiative also aimed to strengthen self-reliance and boost exports.

However, India's share in the world's merchandise exports has remained stagnant despite exceeding $400 billion in the decade since the initiative was launched (Chart 5). India has taken its share of high-technology exports in total manufactured goods exported up by over 3 percentage points between 2014 and 2022, while in the same period, China has seen a drop of over 6 percentage points.

The share of India's overall high-technology exports, though, remains small compared to China,Vietnam, and the global average (Chart 6).


A Decade of Make in India


Source Sameer Want/Statsguru

Automobile Sales in September 2024 - FADA

 


The overall automobile sales in September,2024 witnessed a significant decline of -9.26% YoY, says Federation of Automobile Dealers Association.


Two wheeler segment witnessed YoY decline of 8.51%, driven by weak consumer sentiment, low inquiries, and delayed purchases due to heavy rains and seasonal factors like Shraddh


Passenger Vehicles like cars, SUVs witnessed Steep YoY decline of 18.81%. 
Commercial vehicle witnessed YoY decline of 10.45%, with only marginal Month on month growth of 1.46%, reflecting subdued market conditions and weak government spending


Three wheelers and tractor segments reported Marginal growth of 0.66% YoY and 14.69% YoY respectively, attributed to positive customer engagement and increasing demand for e-rickshaw options


Passenger Vehicles (PV) Dealers are facing all time high inventory levels of 80-85 days, equivalent to 7.9 lakh vehicles worth ₹79,000 crore due to aggressive OEM dispatches. Dealers are under financial pressure, with increased cash flow challenges
FADA urges the RBI to issue stricter guidelines on channel funding policies to mitigate the financial risk faced by dealers. 


FADA said it is “Cautiously Optimistic” on the overall outlook. “While the festive season presents an opportunity for recovery, the high stakes in October make it crucial for dealers and OEMs to clear existing inventory. Strategic inventory management and targeted festive promotions are key to capitalizing on the expected surge in demand and stabilizing market conditions,” it said.


Source: The Hindu