82 i chronicle

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Cover Story Not just a Shaky CAD
Outlook Australian Dollar
Stats Expenditure in Rural & Urban India
Emerging Country Colombia
In Focus Are consumption pattern change and vegetable inflation linked?

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82 i chronicle

  1. 1. Investeurs Chronicle October 2013, Volume: 82
  2. 2. Cover Story Not just a shaky CAD Our short-term debt and capital outflows have weakened the rupee. The major cause for the rupee’s devaluation has been the massive merchandise trade deficit due to the high level of merchandise imports (not just oil and gold) unmatched by exports. The country has become dependent on capital inflows to finance the trade deficit. This is simply not sustainable. It is a weak position to be in, and a treadmill from which it is difficult to get off. Simultaneously, there are several other major factors pulling down the value of the rupee. The first of these has been getting media coverage in the recent past, and that relates to the increase in short-term external debt due for repayment in the next 12 Spike in external debt months. The country has to find the foreign exchange to meet this obligation. The forex markets are seeing this increasing demand for dollars which, in the face of the mounting current account deficit, is depressing the value of the rupee. Short-term debt, which was under 4 per cent of total external debt 10 years ago (Table 1), has ballooned to a quarter of total external debt as of December 2012. The country’s short-term external debt has increased by a factor of 25over the past decade to $92 billion as of December 2012. On October 6, it was reported that short-term debt (residual maturity of up to one year) was $170 billion as of June 2013, with its share in total external debt going up to 44 per cent. This is the result of policy measures permitting loose external funding over the past decade, on the assumption that money will continue to flow in unabated. The assumption is highly suspect, and hence we have the unfortunate situation of senior members of the government pleading with foreign investors to invest in the country, and calling for further “reforms” encouraging FDI/FII inflows. Foreign exchange outflow due to investments into the country has gone up seven-fold over the past 10 years to over $22 billion last year from a mere $3.5 billion The unseen outflow in 2002-03 (Table 2), clearly another factor causing the value of the rupee to go down. There is no talk about this whatsoever. Of course it is natural for investors to get a return, and it is fair that they get it. From a policy perspective, the dialogue is only about what comes in. When policymakers talk about FDI/FII inflows, they should simultaneously talk about the potential outflows for a balanced perspective. As a result of the factors causing the huge and unprecedented drain in forex, India achieved the undesirable distinction of being the nation with the largest current account deficit of over $80 billion last year, barring the US, in a field of 193 countries listed in the CIA World Fact Book
  3. 3. Cover Story The US, which is in the privileged position of being able to print the world’s reserve currency, does not count on this table. This is a distinction that India can do without, and there is no cognisance of this fact. The Finance Minister recently stated that India’s current account deficit should be brought down to $70 billion for the year ending March 2014 (although how that is to be achieved is not spelt out). It should be noted that this will still keep India on top of this league table. Reports at the time of writing say that the current account deficit has come in at $6.8 Still on top billion for the month of September, thanks largely to the restraint in imports of gold. This is the lowest monthly deficit in the past two years, and it was reported as some sort of an achievement. It would be prudent to be aware that this is very temporary since the underlying causes of the problem have not been addressed. An external development — the proposed Quantitative Easing of the Federal Reserve in the US — was blamed by the authorities as the main cause for rupee devaluation in late August. The explanation offered was that some portion of the foreign capital would have shifted back to the US and that put pressure on the rupee. The question to ponder is this: Why and how did India get into such a helpless spot that the proposed action of the Federal Reserve can cause such havoc to the value of the rupee? After all, the Federal Reserve will do what it thinks is best for the US and it will never subordinate its national policy to serve the needs of other countries. The Federal Reserve has held its proposal in abeyance for now but it is only a matter of time before it comes up again. Another external factor to consider is speculation against the rupee. An external market for the rupee — the non-deliverable forward (NDF) market — operates offshore, outside India’s jurisdiction. This market has been growing significantly over the past five years, with concentration in London and Singapore. What started as a hedge against risk of fluctuation has reportedly crossed the thin line to speculation against the rupee. It is reported that the average daily trading in rupee NDFs in London alone increased from $1.5 billion in 2008 to $5.2 billion in 2012, a jump of 250 per cent. The government has taken note of the impact that the offshore NDF market for the rupee has on the onshore market, and is talking of steps to control this phenomenon. How did India allow itself to be in such an exposed position in the first place? The authorities are not coming clean on the total problem. Blaming external developments, which were only the proverbial last drop that caused the cup to flow over, is merely a deflection. India has to urgently do a lot more than what has been done till now to gain control of the value of the rupee. Anything less is a disaster waiting to strike. Source: The Hindu Business Line
  4. 4. Outlook-Australian Dollar Markets continue to grapple with the coughs and splutters of two very large liquidity pumps on either side of the Pacific. In the US it’s the resurgence of QE prospects which is driving the share market rally. In China its bubbly asset markets and hot money inflows forcing the PBOC to drain reserves via ceased repo operations. Concerns about rising money market rates in China, may weigh on the Australian currency. China's benchmark seven-day repo rate rose nearly a percentage point on Oct 24, 2013 after China's central bank let cash flow out of the money market for a second week. The Australian dollar has risen at least three US cents since the beginning of the month, hitting a series of five-month highs in fourth week of this month (Oct’13). The volumes are looking a little bit thin out there at the moment. It’s a very confusing picture at the moment because we have a lot of things going on. Most central banks have been ruling out the chance of a further interest rate cut, but they’re also pushing out the chances of a rate rise out further and further. There is a bit of nervousness that US politicians would go through another round of brinkmanship when it has to get its budget passed in January. The US government was shut down for the first two weeks of October after the Congress failed to agree to a budget by the end of the financial year. AUD/USD was trading at 0.9607 on October 25, 2013 and we expect that it may test higher to 0.9765- 0.9792. Stats Gloss Mark Up Mark up - the amount added to the cost price of goods, to help determine a selling price. Essentially it is the difference between the cost of the good/service and the selling price, but it does not take into account what proportion of the amount is profit. Expenditure in Rural & Urban India
  5. 5. Emerging Country- Colombia Colombia officially the Republic of Colombia is located in northwestern South America, bordered to the northwest by Panama; to the north by the Caribbean Sea; to the east by Venezuela and Brazil; to the south by Ecuador and Peru and to the west by the Pacific Ocean. Colombia is Latin America's fourth largest economy and its short-term growth prospects remain strong by OECD and Latin American standards. Colombia has a free market economy with major commercial and investment ties to the United States. The main activities of Colombia are petrochemical industry, coal, textile industry, construction, coffee, dairy, sugar, bananas, flowers, cotton and meat. The GDP in Colombia was worth 369.80 billion US dollars in 2012. The GDP value of Colombia represents 0.60 Vital Economic Statistics of Colombia Economy percent of the world economy. Colombia’s economy slowed during the first quarter, however it did not compromise Particulars GDP (nominal) GDP Growth rate Currency Credit Rating imports of US$4.735 billion. The Balance of trade surplus in 2012 of US$5 billion and exports of $60 billion. Fiscal Deficit Current account deficit year end growth forecast of 4.1% of GDP. For 2014 expect a more robust growth rate of 4.7%. Inflation will be slightly below the midpoint of the target range in 2013 (2.7%) and slightly above in 2014 (3.2%). Colombia’s balance of trade figures for January saw a deficit with export figures of US$4.948 billion outweighing Traditional export industries that have contributed to this growth include petroleum, which raised $3.2bn in 2012, and ferronickel, up US$58m in 2012. FDI fell 6.2 percent to $8.75 billion from the $9.33 billion it received in the same period last year. In full-year 2012, the $330 billion economy attracted $16.7 billion in direct investment from overseas. Inflows to the oil and mining sector, which accounted for 83 percent of total FDI in the first half, dropped 5.5 percent to $7.258 billion. Bilateral trade between India and Colombia has increased from US $ 946.95 million in 2009 to US $ 2486.82 million in 2012 reflecting an increase of over 150%. Exports from India to Colombia increased from US $ 503.82 million to US $ 1123.80. Similarly, imports from Colombia increased from US $ 449.13 million to US $ 1363.02. Details $369.80 billion (2012) 4.00% (2013) Peso BBB (S&P) BBB-(Fitch) BAA3 ( Moody’s) 2.4% of GDP ( 2013) 3.3% of GDP (2013)
  6. 6. Forex In Focus Are consumption pattern change and Data from 14th October 2013 to 25th October 2013 vegetable inflation linked? 6112.7 0 20,607 .54 6144.9 0 20,683 .52 Sensex 28781 inflation problem has its roots in a sharp increase in demand for certain food items that people eat more frequently as incomes rise. abating for a while, the steely gaze of the Indian central bank seems to be fixed on vegetable inflation. Rising consumption of certain food items such as fruits and vegetables may be driving inflation. “We really need two transformations in this country—more investments and less consumption of certain kinds. There is still fair amount of inflation on certain kinds of household products, of course, vegetables, fruit and things like that 47490 The best way to check if structural shifts in consumption patterns are causing inflation is to see if there are changes in the share of expenditure on these food Silver (1 Kg) items in the consumption basket of the average Indian. There are two key reasons. Both relate to supply-side issues rather than to 110.24 61.63 106.93 Crude Oil ($/barrel) One theory that was put forward by senior officials at the RBI was that the poultry were apparently driving up their prices. Now, with such protein inflation 49920 Gold (10 gm) persistently high food inflation for many years. One example is protein-rich food. Increased consumption of pulses, eggs, fish and Nifty 30807 The price of onions is a political hot potato right now, but India has battled demand. First, in the case of many vegetable such as onions, prices have seen a sharp increase over the past decade despite an unprecedented rise in production over the past decade. Unfair trade practices by a small group of politically connected traders in wholesale markets have distorted commodity prices in India. 61.30 Dollar/INR Second the heavy concentration of production of key vegetables in a few states (e.g., 45% of onions in Maharashtra, 49% of cauliflower in West Bengal, etc.) limits a nationwide response in case of crop failures. Source: Mint
  7. 7. About Investeurs Consulting Private Limited For a good business, finance is as crucial as vision, management and product. Intuitively then Business Finance plays a vital role in the business prosperity. We, at Investeurs Consulting Pvt. Ltd understand and appreciate the vitality of this discipline and the responsibility that comes with it. As Business Finance Consultants we realize that finance is an enabler that Domestic Trade Finance: Negotiation of Inland Letter of Credit Working Capital Management International Trade Finance: Capital Investment: Buyers’ Credit and Suppliers’ Credit Project Funding and Term Loan Factoring Private Equity contributes significantly towards realizing your business goals. We bring to the table 18 years of vast and vivid exposure to different businesses, a profound understanding of business and financial dynamics and excellent TeamChronicle Rating Assistance relationship with banks/ financial institutions. Akanksha Srivastava akanksha@investeurs.com Nidhi Gogia Harpreet Kaur nidhi@investeurs.com harpreet@investeurs.com Investeurs Consulting Pvt. Limited Disclaimer: InvesteursChronicles is prepared by Research & Analysis Team of Investeurs Consulting Private Limited to provide the recipient with relevant information pertaining to the world economy. The information contained in the document is based on the releases made by various newspaper & publications; hence, we are not responsible for any inaccuracies in the information provided. S-26, 27, 28, 3rdFloor,Veera Tower, Green Park Ext. New Delhi-110016, www.investeurs.com

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