Why India rupee is on its path to recovery

Rupee completed its biggest weekly gain since October 2009 amidst optimism over increasing dollar supply. The INR closed at Rs. 63.50 against the USD. Equity markets traded with a cautious note ahead of the US Fed meet scheduled on 18th September 2013.

The most actively traded 7.16%2023 10 Yr Benchmark bond closed 11 bps lower than the previous week implying a yield of 8.50%.

The credit spread between G-secs and corporate bonds remained unchanged across tenors. US economy is largely driven by consumer spending, amounting to about 70 per cent of their economy.

Americans are being hampered by weak pay, increase in social security tax and tepid hiring. Average weekly pay checks have grown just 1.3 per cent since the recession ended more than four years ago. Both the giant retailers Wal – Mart and Macy reported a disappointing profit for its second quarter and cut its outlook for the year signifying the weakness in the consumer spending.

Wal-Mart is considered an economic bellwether as it accounts for nearly 10 per cent of nonautomotive retail spending in the United States. It's a picture the Federal Reserve will weigh, while deciding the scale of QE.

In my considered opinion, the revival of US economy is a long drawn process. IIP (India’s Industrial Production) data for the month of July at 2.6% was much stronger than the consensus estimate reflecting the recovery in the economy.

Under manufacturing sector, 14 out of 22 industries have shown increased production activity during July 2013 as compared to June 2013.

Among the sectoral performances except mining; manufacturing & electricity grew by 3 & 5.2% respectively compared to the previous year. Looking at the user-based classification, all segments except Consumer Goods have shown a positive m-o-m growth in July 2013. Probably during Diwali festival, the same is expected to display a higher degree of traction.

Recently, the chief equity strategist of Asia’s one of the leading brokerage group made a reference regarding the risk of sovereign crisis for India. There is no merit in this argument since the Government borrowings are pre dominantly funded internally due to our high house hold savings.

Bank deposits constitute 46% of the Indian house hold savings followed by currency, PF, Insurance, and shares constituting a meager 3.4%. Debt to GDP ratio is one of the lowest at 51.6% as against other Asian (except China) and developed countries.

With macro data pointing towards the path of recovery and the INR showing strong signs of stability, there is a definite case for the RBI to ease liquidity and soften interest rate to accelerate growth in the forthcoming monetary review policy scheduled on 20th September 2013.

Investors in the long duration funds should stay put and will start reaping dividends for their patience. It’s also time to start increasing allocation to diversified equity funds through the systematic transfer plan ie invest in liquid funds and transfer a fixed amount at regular intervals over a longer period of time.

Happy investing!

Disclaimer: No content on this blog should be construed to be investment advice. You should consult a qualified financial advisor prior to making any actual investment or trading decisions. All information is a point of view, and is for educational and informational use only. The author accepts no liability for any interpretation of articles or comments on this blog being used for actual investments.