Greed or fear? Rupee, market gloom may be overdone

Smart investors buy when there is fear in the air; they sell when they smell greed.

Right now, there is too much fear in the Indian markets as the Reserve Bank of India (RBI) and the finance ministry took blundering steps to prevent a collapse of the rupee in the face of a high current account deficit. Their hamhanded actions have sent investors into a state of panic, not knowing what to expect next.

In Friday’s markets, the rupee breached its all-time low and was selling at Rs 61.7-61.8 to the US dollar, while the BSE Sensex was down nearly 750 points towards the close.

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There is fear in the air because the RBI sent a message of utter panic on Wednesday when it started imposing capital controls on outward dollar remittances by Indians. The bank also banned property purchases abroad and clamped down on gold imports.

[caption id=“attachment_1038549” align=“alignright” width=“380”]  There is fear in the air because the RBI sent a message of utter panic on Wednesday. Reuters[/caption]

Investors - especially foreign investors - may be wondering whether they will be allowed to take their money out next. This is the cause of the panic selling in both rupee and stocks.

This is the time to start believing a little bit more in the rupee and the Indian stock markets.

Here are five reasons why.

One, the rupee has fallen too much, too soon, and too inexplicably. To be sure, when markets make up their minds, they take no time adjusting. But at nearly 62 to the dollar, investing in India makes more sense than taking money out.

Two, fear of the end of US quantitative easing is overblown. There are two ways to look at a tapering down of QE, assuming it starts happening soon. One is that capital outflows may accelerate, as money heads back to the US. The other point is that an end to US Fed bond buying means the US economy is looking up. And at Rs 61-62 to the dollar, Indian exports will rebound if the US economy is back in action. This is already starting to happen - as the July export figures show. They rose 12 percent - a 21-month high. Imports fell 6 percent. The trade front may be turning around.

Three, GDP growth is likely to be 5 percent or less this year. This means CAD will start falling automatically on lower import demand; as that begins to happen, the RBI will start easing interest rates. This may not happen very soon, but the medium-term trajectory of rates is downwards. This means stocks should start rebounding soon. Stocks and rates are inversely related.

Four, a low rupee means higher profits for domestic companies which will now face less import competition. Since the bulk of Indian companies are focused on domestic sales, corporate profits will rebound sooner than later. The only problem is dollar-denominated debt. Overall, though, the Sensex cannot afford to languish when profits start bottoming out.

Five, it doesn’t matter whether the rupee touches 65 or even 70 in the short run. It only means the rebound will be faster. It does not matter whether the Sensex hits 18,000 or even 15,000. As fear rules, intrepid medium to long-term investors with cash in hand will start investing.

In January this year, this writer said it was not the time to bet on the rupee. And the rupee’s journey has proven us right. When the rupee hit 60, the opinion changed.

Now, though, it is not prudent to keep betting against the rupee. This is not to say the rupee won’t go lower, but just that it will be unnatural for it to keep crashing forever. The rupee is now at a level where there is real profit to be made from exports, and domestic sales will be more profitable as import competition is reduced in many areas.

It is time to control your fears and start investing.

The only fly in the ointment is the general elections, but consider this: no government can afford to mess around with the economy and reforms over the next two years, even if it happens to be headed by the Third Front. And if the BJP under Narendra Modi, or some other leader, heads the next coalition, the market will head north.