Rupee flat on its back
With this combination of a demand for oil, a demand for gold (due to lack of faith in India's capital markets), and a policy log jam that adds to the import bill, the recent sell-off in the Indian Rupee is not surprising. But its velocity - and ferocity - is. The forward rates would indicate that the INR will weaken further (Graph 4). But the forward rates are more a function of traders running in where they see weakness as opposed to a fundamental argument for the weakness.
Graph 4: INR Forward premia
The Real Effective Exchange Rate of the Indian Rupee may be closer to USD 1 = 55 (Graph 5). The blue line of the actual fx rate tends to sway around the red line of the theoretical REER.
Graph 5: INR is undervalued in REER terms,
which suggests an INR rate of Rs 55 per USD
But markets don't always care about the underlying theory.
The markets know best - at least for a while.
As long term value investors, we can feel the moment to buy a truckload of Indian equity is approaching.
The recent weakness in the Indian Rupee and the sharp sell-off in many stocks have seen an emergence of value.
We are not yet "upping" the weight allocation to India for international clients but, with a little bit of patience, the stocks of companies we like run by managements we can depend on may come our way in the next few weeks.
No, we're not there yet...but...stay tuned...its possible we may turn bullish on stocks pretty soon.
With this combination of a demand for oil, a demand for gold (due to lack of faith in India's capital markets), and a policy log jam that adds to the import bill, the recent sell-off in the Indian Rupee is not surprising. But its velocity - and ferocity - is. The forward rates would indicate that the INR will weaken further (Graph 4). But the forward rates are more a function of traders running in where they see weakness as opposed to a fundamental argument for the weakness.
|
| Source: Bloomberg |
The Real Effective Exchange Rate of the Indian Rupee may be closer to USD 1 = 55 (Graph 5). The blue line of the actual fx rate tends to sway around the red line of the theoretical REER.
which suggests an INR rate of Rs 55 per USD
|
| Source: RBI, Bloomberg; data used is RBI 36 country REER |
But markets don't always care about the underlying theory.
The markets know best - at least for a while.
As long term value investors, we can feel the moment to buy a truckload of Indian equity is approaching.
The recent weakness in the Indian Rupee and the sharp sell-off in many stocks have seen an emergence of value.
We are not yet "upping" the weight allocation to India for international clients but, with a little bit of patience, the stocks of companies we like run by managements we can depend on may come our way in the next few weeks.
No, we're not there yet...but...stay tuned...its possible we may turn bullish on stocks pretty soon.
No comments:
Post a Comment