With globalization comes the fear of economic contagion. The
Indian economy has been no exception to this rule. The sovereign
debt crisis in Europe and slow economic growth in the U.S. were
some of the reasons that caused massive capital outflows from the
Indian capital markets and caused downward pressure on the Indian
Rupee (INR). The rationale behind this is that during periods of
economic uncertainties, foreign investors generally withdraw money
from risky emerging market investments and park them in
substantially low risk assets. (Read
Guide to Small Cap Emerging Market ETFs
Of course, recent domestic reasons on the Indian front were also
responsible for the dismal performance of the currency. The growth
has been declining and the central bank does not have much
flexibility on the monetary policy front due to high inflation. The
GDP for the quarter ended March 2012 rose 5.3%, sharply down from
6.1% in the previous quarter. Recently the rating agency
Standard and Poor (S&P)
lowered its outlook from
"stable" to "negative"
on India's sovereign rating along with 11 banks, despite the banks
being adequately capitalized well above the regulatory norms. (read
ETF Trading Report: Growth and Banking ETFs In
) (since any financial institution cannot be rated higher that the
sovereign). This combination of external and domestic factors
caused further downward pressure on the INR. (see
Does Your Portfolio Need An India ETF?)
(5.9% of GDP) and increasing
current account deficits
(2.7% of GDP) are the main causes of worries for the Indian
economy. Higher fuel and fertilizer subsidies and lower revenues in
the form of taxes have worsened the fiscal deficit scenario.
Moreover, increased imports of gold, crude oil and consumer goods
coupled with a depreciating rupee also led to the widening of the
current account deficit.
On the tax front, one of the major problems faced by the Indian
government is tax evasion, both by domestic as well as foreign
players. In order to grapple with this pressing problem the
Finance Ministry of the Indian Govt. proposed to implement the
General Anti Avoidance Rule (GAAR)
, thus trying to curb the avoidance of tax. However, the proposal
seemed to have backfired. Due to lack of clarity on the GAAR, the
Indian Capital markets witnessed heavy selling pressures from the
FII's resulting in underperformance of the INR relative to the USD.
Bet Against the Dollar With These Three Currency
The Reserve Bank of India (RBI) made a delayed intervention in
order to prevent the INR from slumping further. Despite the rising
inflation worries, RBI lowered the benchmark rate
by 50 basis points to 8% in order to improve the liquidity in the
The RBI also asked the exporters to convert
50% of the USD
held by them in the
EEFC (Exchange Earners Foreign Currency)
account to INR in order to artificially increase the demand for
rupee and prevent it from sliding further. The Central Bank has
resorted to selling USD in the open markets as well as implemented
measures to curb speculation in the currency market by banks and
other players in order to prevent the rupee from sliding further,
but heavy foreign currency outflows on account of selling pressures
due to global economic uncertainties seem to be taking its toll on
India's foreign exchange reserves level is very impressive and
as of December 2011, India was
in terms of countries having the largest forex reserves.
However, despite high level of reserves, the exchange rates remains
vulnerable to foreign capital flows as the foreign exchange markets
are pretty thin. (read
India ETFs: Trouble On The Horizon?)
The INR exhibited a two way movement with a bullish trend until
July 2011, reaching a peak of Rupees 43.94/USD on 27
July 2011. However, it started its depreciating trend post broader
market slump in the U.S. The INR/USD breached crucial levels of
Rupees 54.23/USD on 15
December 2011 and hit an all time low of Rupees 56.67 on 31
May 2012 after the announcement of a very weak GDP growth for 1Q12.
Subsequently the rate has appreciated to about Rupees
55.50. At the current levels, the decline seems to be overdone and
there are chances that the currency may appreciate slightly in the
near-to-medium term from the current levels.
It is prudent to note that along with the INR some other major
currencies such as Brazilian
, South Korean
and South African
also plummeted versus the USD signifying increased demand for the
safer USD in times of global economic uncertainity.
However, favorable demographic characteristics, growth
potential, scope of diversification and supportive economic
policies will make India an attractive destination for foreign
investments whenever there is slight improvement in the global
The following exchange traded products cater to the investors
seeking exposure in this segment.
Market Vectors Indian Rupee/USD ETN (
Launched in March of 2008, the Market Vectors Indian
Rupee/USD is an Exchange traded note issued by Morgan Stanley that
seeks to capture the essence of the S&P Indian Rupee Total
Return Index. The index tracks the performance of the Rupee
relative to the USD. The Index represents investments in three
month non-deliverable forward contracts. The investments are cash
settled after holding it till maturity and then rolled over into a
The product has $2.50 million in total assets and charges
investors 55 basis points in fees and expenses. The product being
an Exchange traded note, it will not have any tracking error as it
does not incur buying and selling of securities. However, it is
subject to credit risk of the issuer.
The senior debt credit rating of the issues stands at A+ and A2
by rating agencies Standard and Poor and Moody's, respectively, but
S&P has a negative outlook towards its long-term debt. The
product has had a tough time in the last one year period given the
fact that the rupee has significantly performed relative to the
USD. The ENT has slumped -12.17% in the past one year period.
WisdomTree Dreyfus Indian Rupee (
ICN invests in investment graded U.S money market securities and
enters into similar size forward currency contracts or swaps
against the INR, in order to provide investors the safety of the
high credit rated U.S securities along with the comparatively high
yielding Indian money market rates. The fund also captures the
relative performance of the INR versus the USD.
The ETF has total assets of $17.96 million and charges investors
45 basis points as fees and expenses. Currently, the ETF has 6
holdings including 4 Treasury Bills, 1 repurchase agreement and 2
money market instruments. The fund has an average yield to maturity
of 0.08%. The interest rate risk is minimal in this product as it
targets the shorter end of the yield curve.
The average daily volume of the product stands at 10,260.
However, due to the dismal performance on the INR versus the USD in
the past one year period, ICN slumped -7.61%..
WISDMTR-IND RUP (ICN): ETF Research Reports
MKT VEC-RUPEE (INR): ETF Research Reports
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