1. INTEROFFICE M EM ORANDUM
TO: DIRECTOR OF FOREIGN CURRENCY MANAGEMENT
FROM: MICHAEL KORYCKI
SUBJECT: A REVERSAL OF FORTUNE: FUTURE GROWTH POTENTIAL OF INDIA AND ITS IMPACT
ON THE RUPEE
DATE: 11/18/2015
CC: DR. JOAN C. JUNKUS
Executive Summary
Recent events unfolding across the Maghreb from Tunisia to Egypt give
companies like ourselves with large foreign exposure more reason than ever to conduct a
timely assessment of where we feel the probable movement of the dollar is headed
against the Indian Rupee. Although India’s robust democracy is a far cry from the
Maghreb’s traditional autocratic and largely corrupt governments, the overthrowing of
any government is traditionally followed by a flight to safety to the U.S. dollar and U.S.
debt holdings. However, those decisions are largely based on fear and emotion, and this
memo will present the most important factors in which we feel will influence the
movement or the U.S. dollar versus the Indian rupee in addition to the flight for safety
currently unfolding.
From a macro-economic perspective, the team at Foreign Currency Management
is concerned about India’s flat lining GDP, its high inflation, and its burgeoning budget
deficit and the implications these three factors will have on the short-term direction of the
currency. Secondly, we are concerned about India’s negative balance-of-payments that is
dangerously mirroring levels last seen during the crisis of 1991. Lastly, technical

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analysis further supports our conclusion that the Indian rupee will fall against the dollar
by the end of the quarter.
Background
For a country with nearly 2,000 years of history, India’s global ascension and
economic rise is a fairly modern tale. Having been allied with Russia during the cold war
and socialist in outlook, the country found itself bankrupt in 1991 and faced a rapacious
balance-of-payments crisis with no more than three weeks of foreign reserves left (less
than $1 billion) in its account.1 In this time Manmohan Singh, then the country's Finance
Minister, pursued an ambitious slate of economic reforms, opening up the country to
foreign investment, ending public monopolies, and encouraging India's bloated state-run
firms to behave like real commercial entities.2 Over the next two decades these measures
paved the way for India to experiment in rapid, technology driven development, to
become one of the world's most celebrated success stories, which of course we have been
a part of ever since.
In the wake of Singh's economic reforms, foreign investment over the next decade
grew to 150x what it was in 1991.3 To put this into some perspective, it would take 57
years between 1960 and 1980 to double personal income whereas in Singh's first decade,
it would take just 15 years and today even less.4 India's human capital was thus
transferred from an albatross into India's most significant advantage.5 As a major U.S.
multinational, we have taken advantage of India’s unpredicted growth and need to be
1 Jim Rogers “Adventure Capitalist” Random House, New York 2004. P. 242
2 Jason Miklinand and Scott Carney “Fire in the Hole” Foreign Policy Sep/Oct 2010 pp.106-112
3 Ibid
4 Edward Luce“In Spite of the Gods: The Rise of Modern India” Anchor Books, New York 2008 p.39
5 Nandan Nilekani “Imagining India: The Idea of a New Renewed Nation” Penguin Books. New York. 2008. p 55

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smart about our future predictions in where the currency is heading, particularly as we are
exposed to exchange rate risk and two decades of unpredicted growth is beginning to
cool.
Macro-Economics and Inflation
India’s rapid economic success has seen a 39% rise in annual income over the
past five years6 that has driven consumers to purchase a plethora of now obtainable
products ranging from new cars, modern homes, technology gadgets of all kinds, and
brand name clothing. However, where India has seen the greatest appreciation in demand
and price is in the massive spike in food prices that are now soaring at an 18.3% annual
growth rate.7 This rapid price inflation on food has especially taken its toll on the poor
who spend the bulk of their wages on staple crops, such as onions for example (according
the Indian Labor Bureau, 45% of the CPI basket-weight is composed of food). The price
of onions in India has tripled over the past month alone forcing the government to make
some attempt to temper by scrapping import taxes for onions, banning their exports, and
instilling price controls by ordering government-run shops to sell at lower prices than
market. Anytime a government intervenes in a free market with price controls is always a
reason for uncertainty as to what lies ahead. Of course, this will have a direct impact on
future GDP, currently at 9% annual growth rate, as the government will shift resources
from investment, education, and savings and will instead subsidize the cost of staple food
products for its population to quell any mirroring of recent popular uprisings spreading
across the developing world. Such price controls should be a warning sign to the future
6 “Indian Inflation Enough to Make Your Eyes Water” The Economist Vol 398 Number 8715 p.72
7 Ibid

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growth prospects of the country as it relates to its currency as FDI may begin to subside.
As of Tuesday, January 25th, 2011, the government once again raised interest rates
to combat headline inflation that has seeped into every facet of Indian life from food, to
services, and especially on wages through higher productivity. The U.S. Federal
Reserve’s recent introduction of QE1 and QE2 certainly hasn’t helped India’s cause.
Low U.S. interest rates over the past two years and the expectation of dollar depreciation
has led to massive “hot money” outflows from the U.S. into emerging market equity
indexes, emerging market ETFs, and foreign direct investment, all of which has led to an
uptick in worldwide inflation.8 This, of course, has encouraged more “hot money” to
flow into India over the past two years, which has further exacerbated the problem as
India fears the effects of the same “hot money” that entered the Asian Tiger market in the
mid-1990s that inevitably lead to a massive bust followed by a prolonged recession and
massive currency depreciation.9
To cool down growth, the Reserve Bank of India has intervened heavily to buy
dollars to prevent the rupee from appreciating too fast as not to stifle its fledgling export
market at a time when many Indian companies, such as Barat Forge and Tata Motors, are
beginning to make gains against foreign competitors. However, when central banks issue
base money to buy dollars, domestic interest rates are forced down and domestic
inflationary pressure is generated.10 In turn, primary commodity prices go up quickly
because speculators can easily bid for long positions in organized commodity futures
markets to take advantage of the low interest rates. As of 2010, the Economist’s Dollar
8 Ronald McKinnon “The Last American Export: Inflation” The Wall Street Journal. Jan 18 2011 pA17
9 “Indian Inflation Enough to Make Your Eyes Water” The Economist Vol 398 Number 8715 p.72
10 Ronald McKinnon “The Last American Export: Inflation” The Wall Street Journal. Jan 18 2011 pA17

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Commodity Price Index has risen 33.5% causing the Reserve Bank of India to reverse
course.11
The country’s current account deficit recently widened to 4.3% of the quarter
ending in September of 201012. India has had no trouble yet in financing this gap but
Goldman Sachs recently suggested that funding a growing deficit from short-term capital
flows remains “the biggest risk to India’s growth.”13
Fundamental Analysis
The Balance-of-Payments is causing reasons for concern in my analysis.
Reminiscent of 1991, India had a Current Account Balance of negative 26.6 billion
dollars in 2010, a sharp decrease of 29% from the previous year that currently places
India’s current account balance at 183rd in a world ranking (See Exhibit 1).14 Though
India’s export sector has seen robust growth in both its manufacturing and service sector,
my fear is that India may experience a currency crisis similar to what was experienced in
Asia in 1998. The recipe is the same: India is seeing a surge in energy demand coupled
with rising prices on oil and natural gas that leads me to believe that India will experience
difficulty paying for these essential imports as has already been indicated by its
depreciating current account balance.
As previously mentioned, in addition to surging energy prices, the central
government is also seeing price inflation in imports ranging from wheat and corn, to
onions and other commodities. A large commodity import as a percentage of total
imports is a weak currency signal. Coupled with massive investments in infrastructure
11 Ibid
12 Ibid
13 Ibid
14 CIA World Factbook https://www.cia.gov/library/publications/the-world-factbook/

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and education, this will all in turn lead to growing pressure on India to service its debt
repayments, with public debt already mounting to 80% of GDP. A large deficit is a
weak currency signal. Overseas investors like us should be concerned about the level of
debt our inbound capital is generating.
Capital account surplus of $14 billion was significantly lower in Q3 2010 than the
previous quarter where it stood at $21 billion.15 The depreciation of the capital
account is largely a result of lower foreign direct investment (FDI) and lower
portfolio inflows, both a weak indicator by investors for the future of the Indian
rupee. India’s official reserves have also steadily decreased as of Q2 2010 that further
stresses the point that the currency is under pressure as U.S. dollars continue to flee the
country (See Exhibit 2).
Technical Analysis
Though never to be taken as a panacea for investing, the following technical
analysis further confirms my forecasts with virtually all indicators pointing to a
strengthening of the U.S. dollar verse the Indian rupee in the medium three-month term.
We can observe from the 50 day moving average that that the U.S. dollar versus
the Indian rupee is currently in an uptrend period as it recently broke through the
resistance level of 45.20 and the price movement since then continues to pace itself above
the support line (see exhibit 3). Looking at the relative strength index the USDINR is
hovering around 50, which indicates a signal that the USDINR is not overbought and
may in fact continue to appreciate further.
15 India’s Balance of Payment Surplus Shrinks Significantly
http://www.livemint.com/2010/04/04212715/India8217s-balance-of-payme.html

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Another analysis that I ran was an MACD to measure the short-term momentum
verse the long-term momentum to help signal the current direction of the movement.
Once again, the analysis indicated that the U.S. dollar still has some room to run versus
the Indian rupee since the short-term 50 day moving average has crossed above the long-
term moving average, another bullish indicator for the dollar.
Lastly, research has indicated that the investment community has a strong buy
conviction on the direction of the USDINR. According to barchart.com, 80% of the
short-term indicators, ranging from 7-50 day moving averages, show buying signals. In
the medium to long-term the buy conviction is even stronger as 100% of the indicators
project the U.S. dollar rallying further higher against the Indian rupee. The overall
averages, coupled with my macro and fundamental analysis, give me as well as the entire
Foreign Currency Management team a convincing opinion that the dollar will rise in
value versus the Indian rupee in the next three months and beyond.

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Exhibit 1
CIA World Factbook
Exhibit 2
Livemint.com http://www.livemint.com/2010/04/04212715/India8217s-balance-of-payme.htm
Exhibit 3

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Barchart.com