I was driving to work and this was playing on 107.1 FM Rainbow
Sammy Kershaw's - Honky Tonk America
Quantunes 001 – Retail Illusion
1 week ago
Friday, July 04, 2008
Reserves and Deficits
The RBI released a report on Balance of Payments over Q4 2007-2008. I stumbled upon this on my weekly browse to the RBI site (yeah I know.. I have no life) - link on the title of the post.
It's a very entertaining and revealing document, a couple of things caught my eye.
There seems to be two main contributors: Short-Term Trade Credits and FDI, that allowed the reserves to grow. If you look back at the data for 2006 and 2007, in each of these years the Current account surpluses of 4.49 Billion and 4.25 Billion don't justify the reserve increases of 13 Billion and 20 Billion respectively.
Kind of obvious when you think about it. If we're not earning enough money (through trade) then the only way our bank balance (as represented by our Reserve) can increase is if we borrow the money.
In a declining Dollar - appreciating rupee regime this seems to make all the sense borrow in Dollar invest in Rupees, earn profits and then repay with less rupees than you started out with. But what happens when this reverses - the Bernanke Fed has the cojones to hike rates (in fact they maybe compelled to sooner rather than later) and the Dollar finally catches a bid.
I'm pretty sure that all these increases in the Capital Account (FDI, FII Portfolio flows, ECB, Short Term Credits) will start going the other way. All these folks buying into the India story will start selling their rupees. In this scenario any decrease in Crude prices is likely to be nullified by a Rupee depreciation. Furthermore if the RBI suddenly decides to try to buy Rupees in an attempt to stabilize the currency this could mean a curency attack.
Add political uncertainity to the mix and things don't look so good now. Perhaps that's whats got the SENSEX spooked.
It's a very entertaining and revealing document, a couple of things caught my eye.
- Import payments increased by 37.2 % - reflecting an increase in the basket of international crude that we buy from $56.4 to $93.9.
- Oil Imports increased by 88.9%
- Given that the price rise was 66% - it basically means we are consuming more even at increased prices.
- The trade deficit was 23.8 Billion US$ - a YoY increase of 85%, again reflecting the increase in oil imports.
- Invisible receipts grew by 26.2% and the invisible surplus was 22.8 Billion US$ - a YoY increase of 33%. Invisibles of course means software, ITeS, travel and remittances from the diaspora.
- Which meant that the net deficit was 1 Billion US$.
Inspite of this deficit the Reserves grew by about 25 Billion US$
There seems to be two main contributors: Short-Term Trade Credits and FDI, that allowed the reserves to grow. If you look back at the data for 2006 and 2007, in each of these years the Current account surpluses of 4.49 Billion and 4.25 Billion don't justify the reserve increases of 13 Billion and 20 Billion respectively.
Kind of obvious when you think about it. If we're not earning enough money (through trade) then the only way our bank balance (as represented by our Reserve) can increase is if we borrow the money.
In a declining Dollar - appreciating rupee regime this seems to make all the sense borrow in Dollar invest in Rupees, earn profits and then repay with less rupees than you started out with. But what happens when this reverses - the Bernanke Fed has the cojones to hike rates (in fact they maybe compelled to sooner rather than later) and the Dollar finally catches a bid.
I'm pretty sure that all these increases in the Capital Account (FDI, FII Portfolio flows, ECB, Short Term Credits) will start going the other way. All these folks buying into the India story will start selling their rupees. In this scenario any decrease in Crude prices is likely to be nullified by a Rupee depreciation. Furthermore if the RBI suddenly decides to try to buy Rupees in an attempt to stabilize the currency this could mean a curency attack.
Add political uncertainity to the mix and things don't look so good now. Perhaps that's whats got the SENSEX spooked.
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