They say that nothing is certain in life except death and taxes. Whilst far too gloomy for my bright and sanguine eyes, just how certain are these two certainties? In the case of India and particularly taxation, the predictability of these words, attributed to Founding Father of the United States Benjamin Franklin, are far from certain!
Vodafone has been caught up in a recent legal storm created by a Supreme Court judgement. The company, provided the local government do not come to its rescue to broker a special deal, is liable to pay around $4bn within three months. With a profit guidance of a little shy of $15bn for the group as a whole, the ruling in India is no small blow to the company.
It is unsurprising therefore that the market believes there is a significant probability of the network provider moving out of the nation. So what? With an incumbent of similar size and a new challenger on the scene what concern is it of ours that a mobile carrier might leave India? Well, Vodafone is the largest single source of foreign direct investment into the nation. Without the capital inflows driven by this foreign direct investment and in the face of capital flight as the huge foreign investment is unwound, the value of the Indian Rupee (INR) could be battered.
This risk to the Indian economy therefore has macroeconomic implications and spills over in no small part to the most liquid of all markets – the foreign exchange market. The Indian economy faces this risk whilst it is already immensely vulnerable. The Reserve Bank of India has cut rates five times already this year as stagnating growth and under 4% (target) inflation reveals cracks within the economy. In light of the dramatic monetary policy and an apparent slow down, the credit worthiness of the Indian economy has also been in question. Moody’s ratings agency has put the nation on downgrade watch, similar to South Africa, offering a negative outlook to India’s Baa2 credit rating. An inflation outlook presented by the monetary authority yesterday showed only a gradual and lacklustre return to target inflation despite the 25-basis point cut only a week or so ago. So, with the economy underperforming and combined with the lowest interest reward for holding rights to its money since 2010, it’s hard to see how the currency can appreciate from here.
Growth still registered at 5% year-on-year for Q2 2019, however, in comparison with the same period last year, which registered at 8%, an undeniable downturn is underway. Lastly, India has a huge exposure to commodity prices because it is a severe net importer of resources, particularly oil. So, when it starts to weaken, it tends to perpetuate its own demise with a heavy flow through to the current account balance already standing at close to -$11bn. Overall, the balance of risks facing India’s economic fortune and therefore currency are so severe it is pragmatic to assume the currency could break the resistance level of 73 Rupees to the US Dollar soon. This level has been tested 4 times already this year so a significant break would set the stage for even further weakness akin to the sell off of late 2018 during the period of broad-based USD strength.
Discussion and Analysis by Charles Porter
Click Here to Subscribe to the SGM-FX Newsletter
Turkish Lira While President Erdogan removed the uncertainty overhanging the Turkish market by winning the election in the run off over the weekend, the news served to cement the certainty that nothing much was likely to change with respect to Turkish economic policy or indeed the subservient role of the Central Bank of Turkey to […]
Is the Rand’s decline isolated? The South African Rand’s sizeable decline over recent trading sessions has spooked markets. During the peak of the sell off, beginning on Tuesday of last week and lasting into Friday’s trading session, the decline in the Rand appeared to spill over into some other emerging markets. With USD/ZAR trading close […]
Chinese Pantomime Signals coming from the Chinese economy are creating dichotomous pictures when observed through the lens of market pricing versus analysts’ forecasts. Part of the reason for the cognitive dissonance that is clearly developing between observers of the Chinese economy is down to the fact that there are many competing forces vying for dominance […]