Friday's India Outlook

Heartening news is that India witnessed a huge fall in the imports of gold metal in the month of August, 2013 gives some relief. India just imported 1/10th of this yellow metal as compared to corresponding period during last year thanks to the continuous efforts of the government and the Reserve bank of India (RBI). The government brought down a regulation that jewelers or banks had to export 1/5th of their gold imports. But, this regulation created some sorts of perplexity. The government has not given any clarification in this regards. Consequently, yellow metal witnessed a great fall in its imports.

Moreover, India saw only gold imports of 553.1 metric tons during the period from January to June 2013 which indicates an average import of gold is at 92 tonnes per month. Its average came down heavily to 23.75 tonnes per month in July and August month.

Current account deficit (CAD) (Current account=difference between outgoing and incoming of foreign funds) in India is at almost $88 billion or 4.8% of GDP during 2012-2013. The government plans to bring down CAD to $70 billion in the financial year of 2013-14.

Meanwhile, the news that the government is weighing up bilateral trades with Malaysia, Thailand, Russia, Vietnam, Turkey, Bangladesh and Mexico by substituting USD with rupee (currency swap arrangements exchanging of our local currency for imports and receiving of other countries’ currencies for exports from other countries to whom we have two way trade), is a right move towards shrinking of current account deficit to a reasonable extent.

The currencies of the majority of these countries lessened terribly against green back.

After assuming charge as Governor of RBI, Mr. Ragu Raman Raju informed in his inaugural speech that when India’s business grew, it would try to complete more deals in terms of rupees.

Another recent pronouncement of Raghuram Rajan with regards to FCNR-B swap arrangement aided to regain 25% of $ 4 billion of outgoing of foreign exchange funds (this outgoing occurred between June and August 2013) in the last 8 trading sessions. That is Foreign institutional investors (FII) purchased shares for the value of $1 billion in the eight previous trading sessions.

Abbreviation for FCNR (B) is “Foreign currency Non Residents (Banks)”. NRI can only access this deposit scheme.
Under this arrangement, sale of US Dollars, which were mobilized through this scheme, by commercial banks to RBI is possible with the agreement to purchase the similar numbers of US Dollars at the closing of the swap period at a fixed annual premium of 3.5 percent. Hence, banks can avoid currency risk under this scheme.

The Main characteristics of this scheme are as follows:-
1. No currency risk for depositors and banks.
2. Fully repartriatable and not taxed in India.
3. Loan to the extent of Rs 1 crore against this deposit.
Banks can make some reasonable earnings through FCNR (B) even after paying interest and premium amounts to depositors and RBI, respectively, by investing in higher value assets.

On September 17, the government of India elevated gold import duty from 10 percent to 15 percent in order to safeguard local industries. Consequently, gold jewelry will become costlier to local consumers.

On September 18, Fed’s affirmation of continuation of stimulus program boosted the global currency, equity and commodity markets. US dollar fell against most of the major currencies.
Rupee climbed up greatly against dollar by 1.62 paisa and closed at 61.78 in India too. Rupee came down and touched an all-time low of 68.85 on August 28.

I have clearly mentioned in my previous article entitled “The State of the Rupee” that US economy is yet to recover from its worst shape. But major US economic data and news peculiarly show its slightest recovery.

Rupee reacted positively against USD as well with the release of news about the reduction in gold imports, CAD and for the announcement of FCNR (B).

However, today (on 20.092013), RBI increased REPO Rate by 25 basis points (bps) to 7.5% and decreased marginal standing facility by 75bps to 9.5% to contain Inflation and reduce the abnormal fluctuation in Forex market respectively, left Cash Reserve Ratio unchanged at 4%.

On seeing current global and domestic economic scenario, I think that precious metals investments like gold, silver etc. may be the right choice for national and international investors.