Cracks in the Armor?
Back in July, I put up a post about the chinks in the economic armor of India. Since July, the BSE Sensex has dropped to a low of 12,575 and rebounded to a high of 15,503 in August. Today it is trading down 149 to 14,174, mostly because of Infosys lowering its guidance. the people have come to terms with the fact that the credit crisis that began in the US over a year ago, has yet to claim additional casualties, specifically, Lehman Brothers. This has also had an indirect affect on Indian comp
The Rupee has gone from a high of Rs. 39.3252 per USD in January 2008 to a low of 43.29 in July and just a few days ago, it hit an intraday low of 45.885. Today, the Rupee is at 45.57 after hitting an intraday low of 45.785. Rs. 46 to the Dollar isn't far off as I said back in July. I think the Rupee will not fall much beyond 46. Perhaps touch 47 and then settle down in the 45 to 46 range, unless inflation rises much faster than expected.
Oil has pretty much crashed from a high of USD 147. What has driven the downward trend in oil has also helped keep inflation in check, here in India. The drop in oil and the slight easing of inflation is primarily a result of decreased demand, which implies slowing economic growth worldwide, as every one knows, but also in India. No one wants to openly admit it but inflation, high commodity prices, rising wages, real-estate sticker shock have finally taken a toll on the Indian economy.
Will oil remain at the $100 level or drop? Your guess is as good as mine. However, I think it will probably drop a little in the short-term but OPEC has already decided to cut production and keep the $100 per barrel as the floor. Count on this to keep oil prices relatively stable until mid November. A bad winter in North America and Europe will most likely push oil prices up but it's unlikely that oil will see the $150 per barrel mark for at least the next 6 months.
I stick with the assessments made back in July. For the short-term be careful where you're putting your money in India and every where else, for that matter. If you're in it for the long haul, this is a good time to start dipping your toes in the water and nibbling at various investment opportunities. As things come further south, it'll be a good time to take small bites and keep increasing your exposure to India.
- pjain's blog
- Login or register to post comments
-
Subscribe via RSS
Subscribe via email
Rising USD
Hi Varun,
Sorry for the late reply. A bug on the site didn't notify me of comments that had been queued up.
A rising USD by itself is good for exporters of all goods and services to a large degree. However, you have to look at the deeper implications of such a strong USD against INR. The INR has fallen more than 10% below where I had suggested (45 to 46) back in July. Why? The main reasons, beyond the obvious global financial meltdown, is the fact that there is a great deal of uncertainty in all markets, especially emerging markets like India. India has not been able to deliver on many of the promises related to growth which so many had been optimistic about. Also, though Indian exports do look much more attractive because of the lower INR, importers across the US and Europe are facing very difficult times and are looking to renegotiate deals that they had previously made with Indian exporters. Many of the exporters are being forced to lower prices in USD to compensate for the rise in the USD. Some of the exporters are going back and telling customers that they will accept payment in INR going forward and not in USD or EUR. Hence, it will be the burden of importers in the US, Europe, Australia, etc. that will take on any currency risk associated with FX movements. What does this mean? It means that the best case scenario for exporters (IT included) is that they will keep their overseas customers and get paid in INR, probably, lowering their profit margins slightly. The worst case scenario is that Indian exporters will lose some of their clients because they themselves are not able to move as much merchandise as they were during the boom, or, they will lose customers because they are unwilling to lower the cost of doing business for their customers. Either way, it's not a pretty picture for Indian exporters.
As for buying stocks. There is still a huge amount of global uncertainty. However, if you are investing for the future, only invest money that you know you will NOT need under any circumstances for the next five years. I don't see any significant upside in the US or Indian markets in the short term for investors. I stress, investors, and not speculators. However, there is a huge opportunity that exists for longer term investors in very specific sectors and companies, globally.
Now, for the Anonymous poster who asked what my take on the impact on India will be because of the global meltdown. I think the next two years will be very tough on India. Companies that over-expanded during the boom like real-estate developers, retailers, airlines, etc. are going to be in for a very difficult period. Just Friday, there were reports that Unitech was in danger of defaulting on loans and asked the Noida Authority to delay payments till January. I don't know how much of a loan we're talking about but it can't be a small amount. I've heard rumors that other developers are in a similar situation. This will have significant ripple effects on the lenders and real-estate investors and significantly on speculators.
I'll try to put up a post in the next few days with some more detailed thoughts. Till then, Happy Diwali!
Cheers,
Pankaj
I enjoy reading your blog
I enjoy reading your blog entries. What do you think the impacts of the current US financial meltdown will have on India?
Isn't the rising dollar a
Isn't the rising dollar a positive for Indian Exports and IT ?
I think its a good time to buy undervalued IT stocks... We might be seeing a good appreciation in value in the next 2 months..
I'm very new to the Indian Equity markets, and am still finding my feet in the jungle.. :)