Goldman Sachs downgrades India, says rupee can hit 65 to dollar

[fast]

Global investment bank Goldman Sachs has downgraded India to "underweight" saying growth recovery remains elusive.

"Recent activity data in the second quarter of 2013 has been sluggish with no signs of a pick-up in investment demand... Against a backdrop of lower growth, tighter liquidity and rising macro vulnerabilities, we downgrade India to underweight," Goldman Sachs said in a statement.

The investment bank had earlier revised its GDP forecasts for India down to 6 per cent from 6.4 per cent for the current fiscal year citing challenging external funding environment and a weaker-than-expected pick up in the investment cycle.

Goldman said a high current account deficit is a key vulnerability for India. India's CAD has risen from 1 per cent of GDP in FY07 to 4.8 per cent in FY13. The primary driver of the current account deficit is oil imports and, given their demand inelasticity, the level of the current account may not change significantly in coming years, Goldman said.

Rising CAD has put sharp pressure on the Indian rupee, which is trading near a record low hit on July 8.

Goldman said the pressure on the rupee will likely continue, if US rates continue to move higher and capital flows dry-up or potentially reverse thereby putting pressure on the current account.

"Our forecast for the dollar-rupee remains at 60 for the year but we expect continued weakness to 65 through 2016. The rupee remains inexpensive relative to our fair value estimate of dollar-rupee 65 which also suggests the currency can continue to weaken," the investment bank said.

Rates may rise:

The Reserve Bank may keep liquidity tighter for longer to stabilize the currency, Goldman said. The RBI has also recently announced a number of measures to tighten rupee liquidity in order to curb rupee weakness. These measures, in effect, constitute a shift in monetary stance from pause to tightening, Goldman said.

"We even think that there is a greater probability of the RBI keeping liquidity tight even beyond 6 months, and hiking policy rates as well, rather than cutting them," the investment bank said.

Goldman Sachs downgrades India, says rupee can hit 65 to dollar - NDTVProfit.com

 

[BDforever]

little weird .. when rupee depreciated to RS 65 against 1 USD (from RS 56 probably), taka appreciated to Taka 77 against 1 USD (from around Taka 82).

 

[Hellraiser007]

Currency devaluation is only for India not for other countries, which indicates it is intentional by GOI.

 

[Chinese-Dragon]

Currency devaluation is only for India not for other countries, which indicates it is intentional by GOI.

So why is the Indian government so desperate to stop the fall of the Rupee?

 

[cloud_9]

Haha pesky Chinese! Economy isn't important these days because there are other important things to sort out first like the issue about secularism, Modi or Rahul....

The economy has been slowing considerably since 2011 but no steps were taken to revitalise it.Looks like the glitter is all gone and we were to busy predicating the doomsday for Chinese economy and got caught off guard (dreaming) :'(

 

[Kolaps]

Haha pesky Chinese! Economy isn't important these days because there are other important things to sort out first like the issue about secularism, Modi or Rahul....

The economy has been slowing considerably since 2011 but no steps were taken to revitalise it.Looks like the glitter is all gone and we were to busy predicating the doomsday for Chinese economy and got caught off guard (dreaming) :'(

It's not just India have economy problem. Even Taiwan too.

US to safe themselves, exported their economy problem to the rest of the world. A country with a weak preparation like India and Taiwan, get hit hard.

Yup, media didn't wrote that. An economy problem and slowdown that came from nowhere, without any explanation.

In the political chaos like Taiwan, caught between superpower interest, it used by foreign controlled opposition to attack the government. US is the cause of Taiwan economy problem, but it is US too, using DPP and Taiwan media to accuse the ruling-KMT as the cause of the problem of Taiwan economy. It's funny but real, and people believe it.

 

[xyxmt]

Currency devaluation is only for India not for other countries, which indicates it is intentional by GOI.

tried to make sense of you statement, then tried harder but couldn't but its confused me like one of those "I dont know nothing" statements

how can india devalue currency of other countries?
because one countries currency goes down not others so its intentional?

 

[Hellraiser007]

tried to make sense of you statement, then tried harder but couldn't but its confused me like one of those "I dont know nothing" statements

how can india devalue currency of other countries?
because one countries currency goes down not others so its intentional?

Just like China devalues its own currency w.r.t dollar, there by making its own human resources cheaper. When FDI is set to arrive in the country devaluing currency will have advantageous.

 

[xyxmt]

Just like China devalues its own currency w.r.t dollar, there by making its own human resources cheaper. When FDI is set to arrive in the country devaluing currency will have advantageous.

but the other argument is that FDI not coming and hence local currency is loosing value vis-a-vis dollar, as dollar becomes scarce

 

[Chinese-Dragon]

Just like China devalues its own currency w.r.t dollar, there by making its own human resources cheaper. When FDI is set to arrive in the country devaluing currency will have advantageous.

Sorry, the Chinese Yuan has actually been increasing in value constantly over the past decade.

There is a lot of demand for Chinese exports, which means there is a lot of demand for the Chinese Yuan.

 

[chhota bheem]

Sorry, the Chinese Yuan has actually been increasing in value constantly over the past decade.

There is a lot of demand for Chinese exports, which means there is a lot of demand for the Chinese Yuan.

When you export ,you dont trade in yuan.so how does the demand increase.when you export the importing country wont pay in your currency.
So you are right about exports but by adding demand for chinese yuan is wrong.

 

[cloud_9]

It's not just India have economy problem. Even Taiwan too.

US to safe themselves, exported their economy problem to the rest of the world. A country with a weak preparation like India and Taiwan, get hit hard.

Yup, media didn't wrote that. An economy problem and slowdown that came from nowhere, without any explanation.

In the political chaos like Taiwan, caught between superpower interest, it used by foreign controlled opposition to attack the government. US is the cause of Taiwan economy problem, but it is US too, using DPP and Taiwan media to accuse the ruling-KMT as the cause of the problem of Taiwan economy. It's funny but real, and people believe it.

You guys can afford a slow down (literally).......We on the other hand will end up nowhere with the slowing economy.

Everybody knows about Malaysia's middle income trap....don't want India to slip into a low income trap.

 

[shuttler]

India defends rupee amid gathering economic gloom

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MUMBAI/CHENNAI, India | Thu Aug 1, 2013 2:40pm IST

The RBI intervened in the foreign exchange market on Thursday to stop the rupee's slide toward a record low as its defence of the currency, built around draining cash from money markets, came under rising pressure.

With the Reserve Bank of India struggling to hold the line, investors are sceptical whether the government will take swift, credible action to reduce a gaping current account deficit despite Finance Minister P. Chidambaram's assurances.

"The market wants real action," said Param Sarma, chief executive at NSP Forex, a consultancy in Mumbai. "The government and RBI want to keep rupee under control to check inflation and to ultimately reverse tightening measures so they can support growth."

Sarma and many others believe New Delhi could opt to issue a bond aimed at drawing inflows from expatriate Indians, as the central bank has voiced opposition to a sovereign bond issue.

The rupee has lost 11.4 percent since the start of May, and by afternoon was quoted at 60.65 per dollar, as RBI dollar selling brought it off a session low of 60.90 and forestalled a move back toward a July 8 record low of 61.21.

The need to shore up the economy with economic reforms grows more urgent given the prospect the Federal Reserve will at some point start removing its U.S. monetary stimulus, making the global investment environment even more difficult for India.

Goldman Sachs downgraded Indian equities to "underweight" from "market-weight" late on Wednesday, noting the RBI's liquidity tightening measures add to the woes of an economy that grew at a decade-low 5 percent in the last fiscal year and is showing "no signs" of a pickup in investment demand.

RBI Governor Duvvuri Subbarao, whose term ends early next month, reiterated that the central bank's extraordinary liquidity tightening measures last month to curb currency volatility will be maintained until the rupee stabilises.

"These measures will continue until the volatility in the exchange rate is curbed and we are as anxious as everyone else that that is sooner (rather) than later," he said during a speech in Chennai.

HARD TIMES

Subbarao also spelled out the challenges facing Asia's third-largest economy

"Our growth has significantly moderated, inflation as measured by the wholesale price index has moderated but retail inflation as measured by CPI (consumer price index) is still high, close to double digits. Balance of payments is under stress, our investments have decelerated," he said.

A survey of the manufacturing sector released by HSBC on Thursday showed the slowdown in Indian factory activity deepened in July as order books shrank by the most in over four years. It also showed an uptick in input costs.

Mahindra & Mahindra (MAHM.NS), India's dominant maker of utility vehicles, on Thursday posted a 21 percent annual drop in sales for the month of July and said it would halt production at its plants for up to six days in coming months.

Investors worry Prime Minister Manmohan Singh's weak, minority coalition will be prevented from taking bold action amid political gridlock ahead of elections due by next May.

Numerous economists, as well as the central bank, have cut their India growth forecasts in recent weeks.

"Although the government has taken many policy initiatives on the infrastructure front and pushed through various reforms so far this year, markets may get worried about the potential policy paralysis ahead of the general elections," said Goldman Sachs in its downgrade note.

ECHOES OF '91

Chidambaram said on Wednesday the government was looking into various options to attract inflows, including relaxing overseas borrowing rules and curbing some imports.

The Indian economy is stuck in a quagmire of low growth, persistent inflation, a wide current account deficit and a rapidly weakening currency, but policy measures to tackle any one of these will likely worsen the others.

As a net importer, India's import bill is quickly inflated by a weakening rupee, leading to higher inflation and a wider current account deficit, which in turn pressures growth and the country's foreign exchange reserves.

The RBI held its policy interest rates steady on Tuesday, but the high short term rates caused by the liquidity squeeze have already forced some banks to put up lending rates, hurting prospects for investment and economic growth.

The liquidity squeeze has caused bond yields to surge. Benchmark 10-year yields are up around a half percentage point since the RBI's measures.

Foreign investors have been heavy sellers of India debt, unloading almost $9 billion in bonds since late May, and a little under $2 billion in stocks since then.

The central bank has been spotted intervening since May, and as of July 19 its foreign exchange reserves stood at $279.20 billion, roughly enough to cover 7 months of imports. Reserves have fallen from a 2013 peak of $296.37 billion, but not all of the decline is due to currency intervention.

Analysts say that ultimately reforms need to be deepened, perhaps on the scale of 1991, when a balance of payment crisis forced India to liberalise its economy.

"The real solution lies in improving the investment climate by giving a strong push to structural reforms the way it was given in 1991-92 and stimulating key exporting industries," said Rupa Rege Nitsure, chief economist of Bank of Baroda in Mumbai.

 

[BigDaddyWatch]

The problem that India faces is the same as other developing countries including China. As growth slows there is capital outflows as the hot money is going elsewhere looking for higher returns. Most likely the money is going into commodity speculation. As the economy slows and the demand wanes prices of commodities are still going up. The capital outflows is what causing the currencies of developing countries to fall in value. China is better able to weather this because of its immens forex reserves of 3,5 trillion dollars. India a country with a consistent current account deficit is much more vulnerable. Another factor is that the US is said to begin tapering the QE programs leading to higher interest rates in the US. This has also played a role in the capital outflows from developing countries as well. But i believe that in the short run there maybe some intermission from the fall as investors understand that the US tapering talk is just that talk and nothing will happen.

 

[walle990]

When you export ,you dont trade in yuan.so how does the demand increase.when you export the importing country wont pay in your currency.
So you are right about exports but by adding demand for chinese yuan is wrong.

China has direct currency trading with Russia, Japan, more recently Australia and Brazil.