Rupee slump shows skepticism over Modi’s reform resolve

The Indian rupee has plunged almost 5 percent against the greenback since pro-business Prime Minister Narendra Modi swept to power in May – so what`s behind the currency`s fall and where is it headed next? Foreign exchange strategists point to a confluence of factors behind the currency`s recent weakness starting with skepticism over the Modi-led Bharatiya Janata Party (BJP) government`s resolve to usher in economic reforms.

“The market is disappointed with the recent budget and a lack of fresh initiates from the new government,” Nizam Idris, head of strategy, fixed income and currencies at Macquarie told CNBC. Since the election, there has been closer scrutiny on the nature and pace of reforms to boost long-term growth and curb inflation in Asia`s third largest economy.

Modi`s maiden budget, delivered in July, failed to live up to the market`s high expectations of big bang reforms. Analysts described it as a step in the right direction, but critiqued it for being short of specifics on a number of key issues, in particular how it plans to achieve a fiscal deficit target of 4.1 percent of gross domestic product (GDP) for the financial year 2014-2015, from 4.5 percent in the previous year.

No one else but Mahatma Gandhi on currency notes: Rajan

As speculation swirled about various names for Bharat Ratna, Reserve Bank Governor Raghuram Rajan on Monday said that nobody but Mahatma Gandhi should feature on the currency notes.

“There are so many great Indians, but of course he (Gandhi) stands above head and shoulders above every one. There are many great Indians that we could get on the notes. But I sense that almost anybody else would be controversial,” the Governor said, replying to a question on why we should not have the scientist Homi Bhabha or the poet Rabindranath Tagore on the rupee notes.

He was taking questions from the audience at the 20th Lalit Doshi memorial lecture on Monday evening. “We have a recent example of a sportsman being made the Bharat Ratna and within sports itself, despite this person being somewhat iconic, there is a lot of debate about who is really the best,” Rajan said.
There was a fair bit of controversy after cricketer Sachin Tendulkar was awarded the Bharat Ratna, the top civilian honour over others like Dhyanchand who captained the nation to glory in its national game– hockey. Meanwhile, on a question about demonetisation to check black money, Rajan said we have tried the same in the past but people find some way around it.

Rajan said he would focus more on existing incentives to get back the black money and added that most of the incentives would revolve around taxation. “My sense is the current tax rate in the country for the most part is reasonable and now if we have a reasonable tax regime, for example maximum tax rate for high income is 33 per cent whereas in the US it is already over 39 percent..

.We are actually lower than many industrial countries,” he said. The Governor said more focus should be laid on tracking data and better taxation in order to get to the undeclared incomes and added that in a modern economy, it is “very hard” to hide money easily.

Thoughts for a Day

TATAMOTORS ADR up 6.77%……..

Updated : 08.10pm / 11th Aug’14

11th Aug’14 FII’s & DII’s Activity

Updated : 06.30pm / 11th Aug’14

June IIP seen rising for third month, inflation still high

Industrial production in India probably expanded for a third consecutive month in June driven mainly by solid growth in infrastructure output, a Reuters poll showed.

Factory output in June likely rose 5.4 percent from a year earlier, faster than the 4.7 percent growth in May, according to a poll of 27 economists. “India’s core sector growth touched 7.3 percent year on year in June supported by a significant pick-up in electricity, cement and coal production”, said Rupa Rege Nitsure, chief economist at Bank of Baroda.

The infrastructure sector accounts for almost 40 percent of India’s industrial output. If confirmed, this would be the strongest expansion in industrial production in 19 months, welcome news for the newly-elected government led by Prime Minister Narendra Modi. Economists in the poll also predicted that July inflation would be almost unchanged from a month earlier even as weak monsoon rains and political turmoil in Iraq were expected to push food and fuel prices up significantly.

Wholesale price inflation likely eased to 5.10 percent from 5.43 percent the month before, while consumer price inflation, the key indicator adopted by the Reserve Bank of India to measure price rises since April, probably gathered pace to 7.40 percent from 7.31 percent in June.

The mixed inflation data will plausibly see the RBI maintaining status quo on rates for longer. Governor Raghuram Rajan last week kept policy rates unchanged saying “upside risks to the target of ensuring CPI inflation at or below 8 percent by January 2015 remain” and underlined his resolve to lower inflation to 6 percent by 2016. “Food inflation will go up quite materially due to scant rains,” said Ashutosh Datar, economist at IIFL Institutional Equities.