By William Patalon III
Goldman Sachs Group Inc. (GS) says it expects the Indian rupee to appreciate to 38 Rupees versus the U.S. dollar over the next 12 months, a currency move fueled by both strong economic fundamentals and an increasing inflow of foreign capital.
The Rupee was trading at 39.15 to the dollar yesterday (Thursday).
But Karim Rahemtulla, an expert on India who is the founder and investment director of the Xcelerated Profits Reports, as well as the editor of the Smart Profits Report newsletter, is projecting an even bigger move in the Rupee against the dollar. Rahemtulla just returned from an investing-research trip to India.
"It's going to go higher – probably to 35 – unless the Indian government clamps down on foreign investment," Rahemtulla told Money Morning. "They would have to curb capital inflows, or lower interest rates. Faced with that choice, they will choose the curbs first. But if they do that [and restrict foreign direct investment], the Indian stock market could fall 40% overnight."
It's almost a Hobson's choice for India's leadership, Rahemtulla says, since a strong move in the Rupee will have a similar effect. While most investors might assume a strong Rupee would be good for the India economy – since it could attract still more investment capital – a strong Rupee negates some of that investment because so many of the country's leading companies do business with U.S.-based customers.
That forces India-based firms, and especially its high-tech players, into an ongoing search for ways to offset the losses from the currency swing. By ferreting out productivity gains, and employing currency hedges, companies can do that – but only for awhile, as neither of those are finite solutions. If the Rupee stays strong, the companies will eventually be forced to raise prices, hurting their competitiveness in the global-markets arena.
Right now, the impact of a U.S. Dollar/Rupee ratio of 38 or higher should not have a huge impact. But should the Rupee rise another 10% or so (into the mid 30s), there will be "pain all around," Rahemtulla said.
A significant strengthening of the Rupee against the greenback "will [also] cause a market meltdown in the short term," Rahemtulla said. "That will cause pain all around. But it will also provide an excellent buying opportunity" in the India stock market, which is promising-but-tough because it's so illiquid.
Rahemtulla said that investors who believe the Rupee will appreciate sharply might want to consider either selling their India stocks now, or at least hedge their holdings with put options. Once stock prices fall, however, investors will have an excellent buying opportunity.
Even if India's regulators actively attempt to slow the Rupee's rise, there is a "very low probability" that these efforts will suddenly reverse the direction in which the currency is moving, Tushar Poddar, a vice-president of Asia Economic Research at Goldman Sachs, told CNNMoney.com, adding that the Rupee's rise against the dollar will likely continue.
"Something dramatic has to change to make that happen," like a stark and sudden deterioration in the political climate, Poddar said.
Experts say that a number of factors are feeding into the rise of the Rupee, including:
- The spiraling weakness of the U.S. dollar.
- The widespread regard for India's educated work force, an asset that's helped the country build a strong tech sector.
- Earnings growth in India that's quite strong relative to other countries.
- The allure of the "India Miracle" growth story.
- A relatively low risk of capital flight, a syndrome that's been ruinous to other emerging-economy bull markets in the past.
- The declining fiscal deficit, high reserves and low external debt means India can tackle financial problems and reforms from a position of strength.
As an example of how key economies overseas are starting to "de-couple" from the U.S. economy – something that was unthinkable a decade ago – Goldman says the ongoing subprime-market mess in the United States won't hamper growth in India. Indeed, Poddar estimates that a 1% slowdown in the U.S. economy leads to a 0.25% slowdown in the India markets.
Goldman Sachs is forecasting real gross domestic product (GDP) growth of more than 8% annually over the next decade, thanks to favorable demographics, rising savings and investment, greater productivity growth and rapid urbanization. [For a recent investment travelogue that Rahemtulla penned on the Indian market – which includes several investment recommendations – please click here].
Goldman also conservatively predicts that India is on track to become the size of the U.S. economy by 2050, though noting that in per-capita terms, it will lag behind the U.S. market, instead appearing more like Korea is today
"The gains in the macro environment have reduced India's vulnerability to shocks and the more difficult part of macro stability has now been achieved," Goldman Sachs reported.
News and Related Story Links:
- Money Morning Market Analysis:
Snapshot From India: Advice on Stocks, the Rupee, High Tech and Real Estate.
- CNNMoney.com: .
- Money Morning Investment Analysis:
Why India Is Losing the Race with China – and What It Can Do to Gain Ground.
- Money Morning Economic Analysis:
China Gets the Buzz, but India Gets the Cash, and Leads in Private Equity Infrastructure Investment.
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning at Money Map Press. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.