The central bank’s monetary steps in the last couple of weeks and leaving the policy rates unchanged on 30 July suggested that it had put a floor of Rs.60
below the exchange rate that the priority for monetary policy was to restore stability in the currency market. This has not worked at least so far— the rupee
has already crossed 61!
The monetary steps could have been prompted by:
• The impact of the change in exchange rate on inflation and fiscal balance going beyond tolerable levels. (As it is the fiscal deficit would be strained by the
expenditure on food security and other subsidies.)
• As the banking supervisor, the central bank’s concerns about the impact of a further fall of the rupee on the quality of commercial bank assets, given that
the corporate sector has huge un-hedged short positions.
• And/or the rupee has depreciated enough to make the tradable sector of the economy competitive enough to bring down the trade and current account
deficit to more manageable levels.
Whatever the underlying rationale, the question is whether the monetary policy steps are enough to stabilize the exchange rate and help attract adequate
foreign capital, in one form or another, to finance the deficit. Several pink papers have discussed an International Monetary Fund (IMF) loan, and
comparisons are being made with 1991. The fact is that the policy choices for restoring stability to the country’s external account are narrowing rapidly.
Higher interest rates- an option?
If one thing is clear from India's impulsive strategies this month to defend a plunging currency, it is that the Reserve Bank of India's policy bias towards
supporting growth is innate, even in a crisis. To most RBI watchers, this amounted to a menu of stop-gap measures that failed to account for lasting pressure
on the currency. To the central bank, it was doing enough to support the rupee without tightening cash conditions so much that it threatened the longer-term
growth of an already weak economy. The eye on growth means it has avoided following its emerging market peers Indonesia, Turkey and Brazil, who all
raised their policy rates in anticipation of a long spell of capital outflows as the United States prepares to tighten policy. Analysts argue it should do so if it
wants to signal its determination to attract foreign funds and defend the currency.
History suggests these decisions are deliberate and ultimately growth is the overriding factor.
The rupee has fallen 33 per cent against the dollar since 2007. As recently as 2010, the RBI's reluctance to raise interest rates for fear of affecting growth
allowed inflation to remain at near double-digit levels for two years.
Saving Indian Rupee
While the case for a restrictive monetary policy to correct the weak rupee is flawed, given that such weakness has more to do with economic fundamentals, what
about the logic for raising policy rates to the Taylor recommended levels?
The Taylor Rule provides central banks a rule to set short-term interest rates as economic conditions change, so as to maintain economic stability and the desired
inflation. It prescribes monetary tightening or loosening based on the observed deviations of the actual output and inflation from the potential/desired levels.
Analysts have applied this rule to the Indian case — with its lower output and higher inflation than desired levels — to call for monetary tightening.
Three recent reports – Nomura, Goldman Sachs and IMF — have suggested that policy rates in India have been lower than the Taylor benchmarks. Nomura has
categorised India in the ‘high risk zone category’ and warned that ‘without less accommodative monetary policies to rein in debt and property markets, and a step
up of structural reforms to boost productivity-enhancing supply’, there could be a crisis in the next few years. It has blamed loose monetary policies for the
deteriorating economic fundamentals. The message is loud and clear: Tighten or face the consequences. However, should the ‘Taylor Rule’ constitute the Holy
Grail for determining monetary policy stance and even if so, are we missing out on some important factors?
The Standard Taylor Rule, based on the deviations in the output gap and the inflation gap, would advocate a tightening monetary policy stance.
This may however be counterproductive, given the trends in savings and investment in India.
With household financial savings having come down at the cost of physical savings and corporate sector investment having declined, a tightening monetary stance
may only exacerbate the problem of growth and inflation, by adversely affecting savings and investment further.
Another problem with the Taylor Rule is that it implicitly assigns equal weightages to the growth and inflation objectives, which may not be applicable to the
Even if we follow prescriptions of Taylor Rule, will it lead to capital inflows on the scale needed to finance the current account deficit? One is not very bullish—for
several reasons. The higher interest rates would surely lead to slower growth. As it is, the Q1 corporate results suggest that profitability is under pressure thanks
to the slowdown. Is this an attractive scenario for portfolio inflows in the equity market? As for inflows in the debt market, the moneys come only at the short end
and if the arbitrage between the interest rates and forward margin is attractive, which today it is not. What about foreign direct investment (FDI)? In the last two
weeks alone, Posco and ArcelorMittal have withdrawn from two major steel projects; Bharti-Walmart has given up leases on 17 properties acquired for its foray
in retail business. Would higher domestic interest rates encourage external commercial borrowings (ECB) because of the more attractive interest differential? The
fact is that, in recent years, the “animal spirits” of entrepreneurs have died and, with a slowing economy, few fresh projects are being launched in the country.
Also, throwing open the ECB window for more and more businesses with no natural hedges to the currency risk, can only further strain the quality of bank
assets. And, given the huge gap between the long and short currency positions of the corporate world, there is no way these can be hedged in the domestic
Economists keep reiterating options such as issuing sovereign bonds either directly or indirectly through a government-backed entity. Bank of America Merrill
Lynch believes that reissuing five-year forex-denominated non-resident Indian bond (at seven-nine per cent) could fetch about $20 billion. Also, there is no
clarity on how gold imports will behave. While they have declined in June, the real test month will be September, which is when gold sales pick up. The real
solution is to increase stable flows from FDI and trade credits to $60-65 billion, if the currency crisis has to be resolved.
However, these immediate concerns—as well as the guessing game in the markets about the direction of interest rates in future—should not reduce the
importance of another message from RBI. It has once again indicated, in its usual timid way, that the Indian economy is losing competitiveness because of
stagnant productivity growth—the result of inadequate economic reforms. The toxic mix of low growth, high inflation and a massive current account deficit is
the cost that the Indian economy is paying for inaction. The weak rupee is only a symptom.
Russian ruble (RUB) retains a bearish tone in line with core emerging-market currencies as the sell-off momentum in high-yield investment portfolios remains in place.
The Russian ruble (RUB) reached a 13-month low vis-à-vis the US dollar (USD) in early July, and although it has failed to weaken further, the currency will remain under
pressure over the coming months on account of strained investor sentiment (leading to strong capital outflows) weaker growth prospects and expectations for looser monetary
policy. The RUB has lost 7.6% year-to-date (Aug 1, 2013) in USD terms, and will likely close the year around the 32.5 per USD mark.
The growth outlook in Russia has weakened on account of external and investment constraints. According to the Ministry of Economic Development of the country, real GDP
expanded 1.9% y/y in the second quarter, a slight pick-up from the prior three months, but still below expectations.
Russia isn't alone in facing a slowdown in growth. In June 2013, the World Bank cut its global economic forecast, partly as the result of slower growth rates in countries including
Brazil, India, Russia and China.
Russia is a classic export-oriented economy, and economic growth in Russia is and always has been driven by prices for oil and minerals. The future of economic growth depends
entirely on commodities prices.
Non Deliverable Forward
An NDF is a short-term, cash-settled currency forward between
two counterparties. On the contracted settlement date, the profit
or loss is adjusted between the two counterparties based on the
difference between the contracted NDF rate and the prevailing
spot FX rates on an agreed notional amount. The main difference
between the outright forward deals and the non-deliverable
forwards is that the settlement is made in dollars since the dealer
or counterparty cannot settle in the alternative currency of the
Emerging Country- Brazil
Brazil officially the Federative Republic of Brazil, Bounded by the Atlantic Ocean on the east, It is bordered on the
north by Venezuela, Guyana, Suriname and the French overseas region of French Guiana; on the northwest by
Colombia; on the west by Bolivia and Peru; on the southwest by Argentina and Paraguay and on the south by
The Brazilian economy is the world's seventh largest by nominal GDP and the seventh largest by purchasing power
parity, as of 2012.Brazil is the largest national economy in Latin America. A member of the BRIC group, Brazil has
one of the world's fastest growing major economies.
Brazil has a mixed economy with abundant natural resources. Brazil has vast natural resources, including recently
discovered large offshore oil fields, a diverse industrial base, a dynamic and sophisticated private sector, and a well-
structured public sector.
Major export products include aircraft, electrical equipment, automobiles, ethanol, textiles, footwear, iron ore, steel,
coffee, orange juice, soybeans and corned beef. It has the fourth largest car market in the world. Adding up, Brazil
ranks 23rd worldwide in value of exports.
The Gross Domestic Product (GDP) in Brazil was worth 2435.20 billion US dollars in 2012. The GDP value of Brazil
represents 3.93 percent of the world economy. 2013 first quarter Gross Domestic Product (GDP) rose 0.6 percent
over the fourth quarter of 2012. In Q1 of 2013, the GDP grew 1.9 percent yoy, up from the 1.4 percent recorded in the
previous quarter, yet below markets expectations of 2.3 percent. The growth was mainly driven by a 17 percent gain
in the agricultural sector, while industry contracted 1.4 percent. On a quarter-over-quarter basis the economy
expanded 0.6 percent. In June, annual inflation rate accelerated to 6.7 percent, the highest rate in twenty months and
above the upper bound of the Central Bank´s limit of 6.5 percent. On July 11th, in an effort to curb inflationary trend,
the Central Bank of Brazil raised the benchmark Selic rate by 50pp to 8.50 percent.
In July of 2013, Brazil’s trade balance turned into a deficit of 1.9 billion USD, from a 2.3 billion USD surplus in June
and 2.9 billion USD surplus a year earlier, as exports shrank and imports surged 25 percent year-on-year. Foreign
Direct Investment in Brazil increased to 7170.41 USD Million in June of 2013 from 3879.94 USD Million in May of
2013. Brazil attracted $65.272 billion in foreign direct investment in 2012, down slightly from $66.6 billion in 2011
but enough to cover a current account deficit of $54.246 billion last year
India's bilateral trade with Brazil 20 years ago in 1992 was just $ 177 million. Brazil's trade relations with India are
expected to reach $ 15 billion by 2015, with exports of $5.04 bn and imports of $5.58 billion. These numbers include
$ 2 bn in export of Diesel and $3.4 bn Indian import of crude oil. Current data indicates that 76 % of Indian imports
from Brazil are crude oil, sugar and soya while 41 % of India's exports ($2.1 billion) in 2012 were diesel, Chemicals
and pharmaceuticals which amounted to $ 697 million.
Vital Economic Statistics of Brazil
GDP (nominal) $2.396 trillion (2012
GDP growth rate 1.90% (2013
Currency Brazilian Real
Credit Rating BBB (S&P)
Fiscal Deficit 2.47% of GDP (2013)
Economic Implications of Telangana
The Congress-led, United Progressive Alliance’s decision to carve out a separate
Telangana State has sought to end this political and business uncertainty, though
most analysts feel it is for narrow political gain. The decision, in effect, means that
Telangana will have 10 districts and be the region it was when it was reluctantly
integrated to form Andhra Pradesh — the first linguistic State in 1956. There are
many who feel it will be “wait and watch” for at least a year before a stable leadership
emerges in the new State, reviving the economy in its wake. In the short term, there
could be a lull in the flow of capital into the new State till some clarity emerges on
industrialisation trends. There could be the migration of Seemandhra (coastal and
Rayalseema) investors away from Telangana for new projects. According to rough
estimates, they own about 75 per cent of the drug, infrastructure, realty, education,
hospitals, hospitality, media and film industry in and around Hyderabad. Today, the
creation of a new capital for the prosperous Seemandhra region requires huge
investments, and entrepreneurs seeking opportunities are sure to go there.
According to estimates, it will require a couple of lakh crores to create infrastructure
in a new capital. All cement plants in the state are running at less than 50 per cent
capacity because the installed capacity was more than doubled in the last five-six
years, when local consumption fell. The formation of a new state is expected to
provide a fresh impetus for demand growth for cement consumption in Coastal
Andhra. On the other hand, the Telangana region is rich in resources. It has large
forest tracts in Nallamalla, tendu leaves (used to make beedis), it is rich in limestone
and coal, and has a bit of granite. It has the Singareni Collieries and limestone
deposits in Nalgonda district. The mainstay in some of the Telangana districts has
been food processing, poultry, dairy, weaving (Pochampalli and Koyyalgudem), seeds
and fertilizers. There are over 100 parboiled rice units and cotton and ginning mills
in Adilabad. One of the big draws of the Telangana region could be its friendly
weather virtually round the year. With the international airport and good road
infrastructure, there is tremendous scope to accelerate growth. Creation of 29th
Indian state creates immense opportunities for harmonious and inclusive
development of both states.
But it is necessary to avoid short-term and sectarian considerations while drawing
up their boundaries to exploit the long-term opportunities for development provided
by the need for building the new capital of Andhra Pradesh.
Gold (10 gm) Silver (1 Kg)
28540 42275 42116
Crude Oil ($/barrel) Dollar/INR
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