I throw in the towel with the Japanese yen.
A couple of weeks back, I went out on a (really thin) limb
buying the yen when the world was selling. The expectation was that the Bank of Japan would disappoint the market and the yen would rise.
A long time ago, my guru in foreign exchange taught me to never stand in front of a runaway train. I should have listened. If you are in the yen trade, I would suggest exiting it now.
Trading the yen is a real enigma. That brings me to the real story for today and that is India. India is often a challenge and needs to be monitored on a regular basis.
Last year, the Indian rupee collapsed when the twin deficits — the fiscal deficit and the current account deficit — were deemed to be reaching unsustainable levels. The rupee crashed 17 to 20 percent, while the stock markets took a beating, as well.
Since then a lot has changed. In August last year, the government finally awoke from its long slumber and started bringing in some real reforms. They opened up the retail sector and airlines to foreign investments. More importantly, it really came down hard on subsidies that were draining the exchequer. The subsidies on petrol and diesel have been nearly done away with. The subsidy was the largest single factor creating the fiscal deficit, as well as creating a large strain on the rupee.
With the reform in place, we have seen a jump in the stock markets and a strengthening of the rupee, albeit the latter not by much.
So how much deficit is acceptable and will India be able to rid itself of the twin albatross across its neck? I believe that the deficits have peaked. The current account deficit hit a historical high of 5.4 percent of gross domestic product (GDP) in the third quarter of 2012 from a 2 percent level in 2009. But with the lower drain on the current account due to the reforms, we will see a steady improvement of the deficit and we could see a level of about 3 percent of GDP by 2015 or 2016.
The primary reason for the lower projected deficit is the assumption of a 5.7 percent growth rate for 2013 and then a 7 percent steady rate of growth for the next couple of years. This growth rate would allow India to start making some serious inroads on the deficits.
The Central Bank of India has continued to act as one. Its mandate is to control inflation and promote growth in the country. It has cut interest rates today because it has seen GDP growth stagnate as well as inflation come in lower. As inflation is not a threat, it can cut rates to promote growth. It also announced that further cuts are possible if inflation falls lower.
While the markets sulked a little bit (Dalal Street fell by 0.5 percent), they will soon get back on the growth trajectory once economic data shows stronger growth.
In a nutshell, I am now getting back in to the Indian market with eyes wide open on the rupee as well as some blue chip stocks to ride the upswing.
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