Indian Rupee hit the target of 54, I had given in last letter titled “ Why Indian Rupee falling precipitously??” (Link: https://investmentacademy.wordpress.com/2011/09/24/why-indian-rupee-falling-precipitously/ ).
I had also mentioned reasons for rupee’s sharp fall like Fiscal Deficit, Trade Deficit and bearish sentiments among Foreign Investors caused by hyperinflation and mismanagement of governance.
Rupee has fallen close to 23% in value from around 44 to today’s high of 54.28 as I am penning this article.
Rupee has almost discounted major relevant factors. Some of the factors are still not publicly discussed in financial media but are of high relevance are our Debt to GDP ratio. Analyst may give you comfort that it is well within range and we need not to worry about it. Out debt is mostly internal and manageable. But, the other factor is not discussed about until last 2 days back, you had IIP data for the month of Oct. It came -5%, is GDP. You have now analysts talking of 7% GDP this year, which I forecasted last year only. Situation is far worse than estimated, we may grow at just 6% and even may be below 6% in years to come. You look at growth in GDP and compare it with Govt borrowing in all those years, you would realise last 3-4 years growth was sustained by Govt spending and there is no real, participative- inclusive growth, Govt is talking about.
My regular readers know that I had been raising concerns on this since long that real economy is slowing. Since 2008, Govt has been borrowing close to 4.5 lac crore from the market to finance different budget schemes. Govt earns close to 6-6.5 lac crore revenue( as of 2009-10 budget estimates). From that, It spends 2.6 lac crore towards interest payment of past borrowing. Govt is left with just 3.5 to 4 lac crore real revenue to spend in economy. Since, it is not enough, Govt borrows close to 4.5 lac crore to match up with expenditures bringing total receipts to close to 10 lac crore.
If YOU go to bank and say, hey, my total income is Rs.10. Rs.6 from salary, Rs, 4 from borrowing and I spend Rs. 2.5 towards interest payment alone, leaving me with real income of Rs.3.5 and I want to borrow another Rs. 4 from you every year. Would bank lend you?? You would be chucked off. But, when it comes to Govt, standard changes and Govt keeps on borrowing until bond investors refuse to buy or asks for higher interest rates. Greece, Portugal, Italy, Ireland, Iceland and Spain have passed through similar situation.
If in this budget, Mr. Finance Minister does not alter his borrowing course and keeps spending without generating massive revenue through conventional and non conventional sources, We are seriously doomed for years to come. We can be another Greece.
In every Quarterly meet, RBI points out at Insane fiscal management and explains that without fiscal deficit control, measures taken by RBI would not produce intended results.
If I put current statistics in picture, our GDP for year 2010-11 has come at 48.77 lac crore and combined liabilities of Centre and State stands at 51.12 lac crore. Our Debt/GDP comes at staggering 104%.
These are all reasons why rupee was falling and Why I expected it to fall to 54 level.
What I expect in short term?
In short term, rupee can stay around this level. Shortly, it should retrace some of its gain falling to 51.50. None of the above mentioned factors(Govt Fiscal deficit and trade deficit) can be reversed in short term, Hence, pressure would continue on rupee.
Next steps taken by Govt would be of prime importance including revenue part of budget and other non budget measures to generate revenue. Govt borrowing program would be watched closely.
I expect this budget to be real tough. Govt would take numerous measures to generate higher revenue.