India is likely to witness further volatility of the rupee in 2014 because of a host of internal and external factors, but the level of movement is going to be significantly lower than what the currency experienced in 2013. Companies should closely monitor the four major trends, outlined below, that will influence the direction in which the Indian rupee will move during the volatile first half of 2014 and create scenarios to ensure local operations are ready for all movements.
The US Federal Reserve’s Tapering of QE3:
While the Fed has decided to continue its quantitative easing for now, improving economic conditions in the United States are going to lead to the end of the program. Expectations are that the program, which is now conducted through a monthly purchase of US$ 75 billion worth of bonds, is to wind down further within the next six months. In anticipation of the end of bond buying, investors are going to be pulling funds out of emerging markets, causing currency volatility similar to that seen in Q3 2013.
Current Account Flux:
The massive decline in the current account deficit over the past few months should allow the annual figure to be in a manageable territory between 2–3% of GDP, reducing the level of risk associated with the Indian rupee and calming the nerves of currency speculators. The recent surge in exports, which rose at a double-digit pace for the fourth month between July and October, bringing in much needed US dollar revenues, should provide further peace of mind to investors. However, demand for oil imports is likely to continue to rise, so any negative movements in global commodity prices will impact the deficit.
Indian Growth Direction:
India’s growth is expected to bottom out by Q4 2013, and the GDP should grow at a faster pace during 2014. Pre-election spending will increase and demand for India’s exports will rise as a result of the West’s recovering economies. Foreign direct investment, a better indication of longer-term investor confidence than stock market investments, has remained robust in 2013 despite slowing growth. FDI increased by 34.7% to US$ 13.6 billion during the first half of 2013 (January–June 2013), mostly due to a rise in M&A activities. However, 2014 is an election year, and it is going to remain a fragile time for India, because the likelihood of any reforms being passed is low and many investors might wait until Q3 or Q4 of 2014 (post elections) to make investment decisions, reducing US dollar inflow.
Ambiguity of General Elections:
India’s growth is expected to bottom out by Q4 2013, and the GDP should grow at a faster pace during 2014. Pre-election spending will increase and demand for India’s exports will rise as a result of the West’s recovering economies. Foreign direct investment, a better indication of longer-term investor confidence than stock market investments, has remained robust in 2013 despite slowing growth. FDI increased by 34.7% to US$ 13.6 billion during the first half of 2013 (January–June 2013), mostly due to a rise in M&A activities. However, 2014 is an election year, and it is going to remain a fragile time for India, because the likelihood of any reforms being passed is low and many investors might wait until Q3 or Q4 of 2014 (post elections) to make investment decisions, reducing US dollar inflow.
Explore Possible Operational Strategies to Mitigate Impact
Operational strategies that executives could put into place to counter the effects of the currency movements include changing payment terms, structuring option-based contracts, working with a contrarian pricing strategy, and even considering acquisitions. It is key to note that these strategies can be implemented by international and regional leaders with limited support from their treasury.
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