THOUGHT FOR THE DAY:
The Indian rupee has been weakening against the USD over time. The graphic provides one month and 5 year charts.
The 5 year low for INR was 67.09 to a dollar hit in Aug 2013, in the wake of the USA Quantitative tightening scare. At that time our USD reserve holdings were low, and the market went through a period of panic and uncertainty. Thereafter, we have seen a steadiness of the INR, even though it continues to weaken against USD. We are now just 1% away from this past low.
If we look at this 5 year period, we can see that the INR weakened in this period by 47.69% absolute. This translates into 9.54% simple average, and 8.11% CAGR weakening per year.
The exchange rate is a complex function of factors such as:
- Trade deficit in India. Net investments including FII and FDI, remittances and outflows.
- Fiscal performance of Indian government.
- Inflation and GDP growth.
- Forex reserves, risk perceptions and trade outlook.
- The rise in interest rates indicated by the US Fed for Dec 2015 is another important event. If it comes through (it’s been postponed several times) it will result in some USD flowing back to USA to earn higher returns with low risk.
- But overall India is well placed to defend its currency. On most of the factors named above, India is doing better now than in the past 5 years. My feeling is that the INR weakening of 8.1% CAGR seen in recent years should slow down to 4-5% over the next 5 years.
- Exports from India remains an important theme in our investment portfolios, given the small base and massive potential. Sectors riding this theme are IT services, pharma and auto ancillaries.
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