Why rupee's fall is bad news for home loan EMIs

Home loan equated monthly installments are a significant drain on salaries, so it's no surprise that the Reserve Bank's policy moves are closely tracked not only by economists, but loan consumers too. When headline inflation eased to over 40-month low in April, a rate cut on June 17 - when the RBI meets to discuss policy rates - looked a certainty. However, the sharp plunge in the rupee has changed all equations and more and more analysts have discounted the possibility of a rate cut next week.

1. Weak rupee fuels deficit: India's current account deficit (basically the net of outflows and inflows) will go up by 0.4 per cent of GDP if the rupee weakens by 10 per cent, according to Nomura estimates. Rising deficit puts further pressure on the rupee and the cycle goes on. "From the RBI's perspective, current account deficit is a concern because it has implications for the exchange rate and thereby for inflation," governor D Subbarao said earlier this month.

2. Weak rupee may force RBI to hike rates: Falling currency reflects poorly on the government's fiscal management and puts pressure on the central bank to intervene in forex markets. "The classic response of a central bank to weakening currency is to raise interest rates," Sonal Varma and Aman Mohunta of Nomura said. Higher rates are aimed to reduce spending and curtail demand of imported goods. The RBI is unlikely to hike rates to defend the rupee because India is growing at the slowest pace in a decade. What the central bank could do is to hold rates until inflation and CAD become manageable.

Since, the falling rupee leaves little headroom for rate cuts, high EMIs may continue to be a reality for the coming months too.

ITC topples ONGC to become second most valued company

FMCG major ITC surpassed state-run energy giant ONGC on Tuesday to become the county's second most valued firm in terms of market valuation, with TCS at the top.

ONGC came behind ITC in the ranking of top-10 companies.

At the end of Tuesday's trade, ITC commanded a market capitalisation of Rs. 2,64,908 crore, which is about Rs. 972 crore more than ONGC's Rs. 2,63,936 crore value.

ONGC's shares ended the day 3.91 per cent lower at Rs. 308.50, while ITC lost 0.59 per cent to finish the day at Rs. 335.25 on the BSE.

IT major TCS with Rs. 2,93,318 crore market cap is the most valued Indian firm. RIL with Rs. 2,54,444 crore market value was at fourth position, followed by Coal India (Rs. 1,96,881 crore).

Market capitalisation or the value of a listed company is arrived at by multiplying the total number of its shares with its stock price on a particular day or time.

The figure changes every day with the change in the stock price.

How a weak rupee impacts you

The Indian rupee hit a record low against the U.S. dollar on Monday as the greenback strengthened against most global currencies. Some analysts say the rupee is headed all the way to 60 if the current trend persists.

Here are the few reasons for that:
Gold prices: Kishore Narne of Motilal Oswal Securities told NDTV Profit a weakening rupee is supportive for gold. That's because global commodities such as gold and silver are priced in dollars. Gold prices, which are down nearly 15 per cent (in rupee terms) in 2013, may trade in a range, Mr Narne said.
Petrol, diesel prices: Crude is the biggest component of India's import bill. A weak rupee is bad for the economy since oil companies, which pay for crude in dollars, will have to shell our more money for importing oil. This will increase India's current account deficit. 
The rupee weakness means there is little likelihood of a respite from high fuel prices, but because global commodity prices have been falling, there's no imminent threat of a price hike either.The rupee weakness is a bad news for students going to study abroad as they will have to shell out more towards their fee and living expenses. Similarly, Indian tourists going abroad will have fewer dollars to spend because of the rupee weakness.
Exporters such as IT firms, which earn a majority of revenues in dollars, will gain from the rupee weakness. Companies like Infosys get over 75 per cent of their business from North America and Europe so a weak currency is beneficial for them.
The rupee weakness is bad news for investors, especially foreign funds. A weak rupee also dents corporate profits (especially for companies that import raw materials) and makes it expensive to borrow from abroad.

Five reasons why the rupee hit record low against the dollar

The rupee plunged to an-all time low against the dollar on Monday, taking its losses to 5.7 per cent since the start of May. The rupee is now the worst performer in Asia over this period. It breached the previous low of 57.32 to the dollar on Monday and is trading at 57.54 against the greenback. Having a currency at an all-time low is not a great advertisement for the government's management of the economy ahead of elections.

Dollar strength: The dollar index has been rising on signs of growing economic momentum and talk of an early end to the Fed's stimulus effort. Thio Chin Loo, senior currency strategist at BNP Paribas told NDTV that it's a general dollar rebound in markets this morning in the back of rising U.S. yields on Friday as a result of slightly better than expect payroll data in the U.S. The dollar is high across the board including the rupee, she added.

Widening trade deficit: Rising deficit is bad for India as it exposes the economy to the risk of sudden stop and reversal of capital flows. In case of an event shock, for example if the U.S. Fed withdraws its bond buying programme, there might be sudden outward flow of money, leaving India scrambling for dollars. The slowdown in the Indian economy has made the current situation even more volatile because the government is unable to generate heavy capital inflow. India's current account deficit was equivalent to a record 6.7 per cent of gross domestic product in December.

Weakness in domestic equities: Foreign institutional investors have been selling index futures in the last week. This is a hedging move as FIIs expect stocks (cash segment) to fall in the near term, traders said. FIIs have been a key support for markets (and the rupee) after buying over $15.38 billion (R90,000 crore) worth of shares this year as of last week.

Rising import bill: Oil and gold imports account for 35 per cent and 11 per cent of India's trade bill respectively. Traders say there has been continuous demand for the greenback from oil importers, the biggest buyers of dollars in the domestic currency market, pushing the rupee lower. Similarly, falling gold prices have offset the government's and the central bank's moves to reduce gold imports, which increases current account deficit and weighs on the currency.

Weak economic fundamentals: Moses Harding of IndusInd Bank told NDTV that weak economy and no signs of a quick fix solution are weighing on the rupee. The UPA government is unlikely to deliver far reaching reforms to generate heavy capital inflows, as it did last September to stave off the loss of India's investment grade credit rating, experts say.

Rupee slides again to hit new low of 58.95 against dollar

The Indian rupee hit a fresh low at 58.95 against the dollar on Tuesday. The currency traded at 58.86 as of 12.18 p.m. against Monday's close of 58.15.

Rupee futures on the National Stock Exchange and the Multi Commodity Exchage have breached the 59 mark, indicating further pressure on the currency.

The sharp depreciation in the rupee has made the struggling economy further vulnerable as imports become costlier, inflation risks rise and record high current account deficit worsens. 

The Indian rupee has depreciated nearly 8 per cent since May 1, making it the worst performing currency in Asia.

The Indian rupee will eventually weaken to cross the 60 mark against the dollar, global investment bank CLSA said on Tuesday. Market analyst Sarvendra Srivastava said the rupee-dollar setup looks "scary" and the local unit is on track to hit 62 against the greenback in 15-20 working days. 

Traders will watch out for any RBI intervention to prevent the rupee from weakening further. The Reserve Bank has followed a hands-off approach towards the rupee, CLSA added.

Other analysts said the central bank can do little to prevent the sharp fall in the currency.

The Reserve Bank does not have enough dollar reserves and surplus rupee in the system to defend the rupee aggressively, Mr Harding said.

source: NDTV Profit