Wednesday, November 23, 2011

Slip and slide away...

There is a lot that’s going on in global financial market and even more at home.  Inflation woes, rupee finding new nadir every passing day (as we speak, there is a mighty hand at play helping our own battered currency), eroding investor sentiment and value (not necessarily in that order), ballooning current account deficit and the list could go on.  Currently though, the rate of depreciation of rupee seem to eclipse all other factors.

Indian currency has been Asia’s worst performer this year depreciating by a whooping 18% since August.  While the run on the rupee is triggered by Euro debt crisis, the stampede was more due to internal factor; lopsided positions with most imports and other dollar liabilities having been kept open when the markets were in a steady state and volatility abysmal. 

There is a variety of suggestion to control rupee’s slide.  Talk is cheap, right? One that particularly amuses me is to open a special window for importers. RBI seems to be telling the market ‘you made your own bed and now I’ll let you lie on it’.  They are doing a bit of damage control, but I don’t anticipate a great deal (and rightly so).  RBI may be micromanaging some areas to ensure overall health and compliance, but I believe market dynamics is merely it and should be left alone.

On the other hand, rupee seems to be achieving its equilibrium from a REER (real effective exchange rate) perspective.  Going by published statistics as of end October, rupee was overvalued by a little over 6.5%; it has depreciated close to 7.5% since.  Also NRIs are happily wiring $s back home to cash in on weaker rupee.  The trend would extend itself (I hope) for larger capital movements into the country.  These are some positives, though in long term.

Not for a minute it is being implied that the current level (or for that matter, any level) of rupee is the right level.  Panic and negative bias seem to be two strong elements of market force, at present.  Rupee seems to be slipping and sliding away feeling light as a helium balloon (but in  opposite direction).

So what to do we do?  We have a bunch of exposure unhedged / hedged and have no clue where the market is going! Good news is, you are not alone.  Better news is, it forces you to rethink your risk management strategy.  Market is ever changing (and challenging) and it’s important to consider insulating business from bizarre event/s such as this.

Time to go back to your drawing board!?

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