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Charts & Analysis

Chart: Dollar Hits All Time High

The USD-INR ratio hit a massive 54.3875 (RBI Ref Rate) and 54.56 in the spot market today.

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Ooh. This is bad. The crude price falling about 10% from the 124 levels down to 112 is getting offset by the appreciation in the dollar.

RBI has been buying heavily and is conducting OMOs to offset the loss of rupee liquidity. (When the RBI sells dollars, it gets rupees that then go out of circulation. So the RBI uses the rupees to buy GOI bonds through OMO auctions to bring the rupees back in)

The rupee looks like it’s going down further and the USD INR Rate is hitting new highs. There are structural problems – the huge trade deficit (nearly $160 billion) is a major factor, and the fact that we simply aren’t doing enough to encourage foreign investment. We have traditionally funded our heavy trade deficit through foreign investment inflows and transfers (read: NRI remittances) – today, while NRIs continue to do their thing, FDI and FII inflows have slowed to a trickle. We need to import a lot lesser and export a lot more. We don’t need a trade surplus but we could make the deficit a lot less wide.

  • What is the economic impact of this? When the rate increases do you see more inflow of USD from immigrants? Do you think this is a temporary displacement or permanent.

  • Kshitij says:

    You have written the ultimate truth, “We need to import a lot lesser and export a lot more”. BTW this situation is unlikely. Because we have never really had anything worthwhile to export! It used to be govt subsidised garment exports. (Woa , talk of high tech). KPOs, BPOs and call centres then saved us. (Wow, what a bunch of hitech industries!). Now the Indian genius needs to find something new to export. The manpower export (NRIs) will also slowdown as their are fewer jobs abroad. We might get higher FDI or something. I suspect auto export boom will be the next industry. New import substitution policies will come into effect. The rupee may continue to fall a long long way.
    I believe things may continue to worsen before they get better.
    But angels wil come to our help! I mean, I believe that oil prices might continue to stay cool or fall further. Gold imports may continue to dip. Our Chinese brothers have bought record gold at record prices. So much for Chinese entrepreneurism.
    The recession will deepen. Inflation will begin to taper. (Yes you read that right!)
    The whole process may taken several quarters. When the system is cleaned (out) stability will gradually return. I feel that several people will loose their shirts (and more). I would encourage all to stay long term optimists. Things may get a lot worse in the near term. But stay put. Survive.

  • IsItPossible says:

    IF this happens: (at some point in future it will…)
    – Greece is allowed to default and leave Euro Zone
    – Spain, Italy, Portugal are not able to implement austerity packages
    – Euro Zone breaks apart and Euro collapses
    As soon as 1st event happens, $ will surge higher and Rs will fall further probably around 56-58 area, next set of events will push it further into abyss between 60-65 area….
    Good for NRI’s but forget about FIIs.
    Unless fiscal & monetary policies are revised and “implemented” in near future (1-3 years) will be VERY bad for Indian economy.
    Dire situation in Europe can cause world wide recession and a very painful one, this might act as a trigger for collapse of housing bubble in China & India adding to the pain.
    Current young generation in India haven’t seen a serious recession yet and this might become a lifetime lesson for many…..