Hope is a Good Thing

The unprecedented decline of the Indian Rupee has been the headline for the past few weeks. The chief drivers have been high current account deficits fuelled (literally) by oil- the sluggishness of the Indian economy driving out foreign investments, which had been impacted by the tapering of the quantitative easing program of the Federal Reserve in the US. No clear and easy solution in sight has further exacerbated the situation.
So, how does this all show up in the world of indices? The S&P Indian Rupee Total Return index, constructed using forward currency contracts and designed to replicate the performance of the Indian Rupee versus the U.S. Dollar, is down 16.64% year to date (as of August 28). Another way to look at the currency performance is contrasting the returns of the S&P BSE SENSEX in rupee and USD terms. On a year to date basis the USD version of the S&P BSE SENSEX underperforms the former by 17.5%. A comparison of the various S&P BMI country indices computed in the local currency versus that computed in U.S. dollars highlights that this is not a unique Indian situation. Looking at the returns for BRIC countries and overall emerging markets year to date (August 28) 2013 show that while Indian markets were not the worst performing in terms local currency but were in USD terms. Brazil is quite close to emulating both the performance of the Indian market in rupee and dollar terms as the real has had a similar slump while the Chinese market and currency have been extremely resilient. The tight band that the Chinese renminbi is allowed to trade in, along with the much stronger economic situation of China, has helped to stem the fall. The broad emerging markets have not done well this year as almost all emerging market currencies have come under pressure after the U.S. Federal Reserve indicated a pull back of the quantitative easing program.

Whether the Indian rupee decline has an impact on the stock market is still to be seen. No doubt the market has been extremely volatile in the last few weeks with some surprising short term upswings in the midst of all the gloom. While there is little dollar denominated sovereign debt, Indian companies, which borrowed in dollar terms this past year as rates were low and companies heavily dependent on imports should see some pressure especially if growth remains anemic.

Hope is a good thing_Alka

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