September 2016
"People know the price of everything, but the value of nothing" - Oscar Wilde

Since 2008 we have seen sharp correction in rupee against major currencies of the world. The INR has moved from 39 to 67 levels against dollar in 8 years which numerically speaking is a 71% correction in 8 years or an almost 7% annualized correction. Majority of us believe that we still have an inflation differential of close to 4% with developed countries and that will be reflected in currency depreciation. Consensus on the street suggests that INR will continue to lose 3-4% every year to remain competitive.

In my opinion it’s extremely important to crystal gaze the relative value of rupee against major currencies. Economics suggests that prices are determined by supply and demand. RBI has kept supply of rupee in check for the last four to five years due to which we witnessed deficit liquidity in that period. This was primarily done to control inflation.

Contrary to India, majority of developed countries were following easy monetary policy. They tried to keep real interest rate negative to push up asset prices, especially real estate.

Rupee Supply – RBI today has structurally brought down inflation by keeping rupee supply in check. There was limited monetary expansion due to this tightening of liquidity. Going forward liquidity will ease and RBI will ensure steady expansion in money supply which will increase supply of rupee in the system.

Rupee Demand –In the past few years we have opened up our economy and allowed FDI in few of the largest sectors of the economy like railway & defense. Passage of GST constitutional amendment bill will encourage more FDI & FII flow in the country. The stability shown by INR in the past three years is helping foreign investors gain confidence. Fall in commodity prices has significantly improved the balance of payment situation. Also in a world of monetary expansion, INR being short in supply will start gaining because of demand supply mismatch.

As Carl Richard quotes – “Tomorrow’s Market Probably Won’t Look Anything Like Today”. I would like to remind you all of a period between 2003 - 2008 where rupee gained against dollar over a five year period. Common sense tells us that we are going to witness something similar.

Currency stability will help majority of domestic facing companies primarily due to lower input cost. GST and FDI in railway & defense will also help towards this cause. We have positioned our portfolio towards domestic facing companies from auto, auto ancillary, FMCG, engineering, cement, logistics and other allied manufacturing industry as they look poised to create a multiyear trend.


Vinod Jain

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