Investment strategy, Economic Outlook, Events, Rupee devaluation, Rising Inflation, RBI steps, How to save rupee and Indian Economy?

Indian Rupee has shown a steep slide against dollar and tumbled to 56 mark. it has put a lot of pressure on Government and RBI regarding how to curb its downside and save currency.

As a part of its implications, government has to raise a fuel prices although the crude price has cooled off from $125 a barrel to $107 a barrel. Currency barrier is preventing India to benefit from low price crude oil. In march, UPA government was resisting to hike petrol prices, due to political turmoil and inflation pressure. India's deficit was at record due to the fuel subsidies and government wasn't able to accord in Parliament regarding fuel price hike.

Now, crude has come down to $107 but unfortunately, deficit burden won't be reduced as currency devaluation. India can't take advantage of falling crude price and the direct impact would be rising inflation. RBI was helpless to spur growth as rising inflation hinders any loosening monetary policies.

Gold as a safe heaven, it has tumbled in global markets but rupee valuation keep it rising and haven't even moved down a little. Due to currency devaluation, USD traded commodities are rising and putting pressure on inflation.

The game is being complicated now, as government is already struggling to keep an accord amongst their alliances and prevent early Lok Sabha polls. Stock markets were tumbling as analysts foresee early polls. Fuel subsidy expand deficit, means can't meet the budget goal. Loosing faith in foreign investors. Inflation to rise if Fuel prices will be hiked. Slowdown will hit manufacturing sector. Small industries won't survive. Banks' NPA will rise or they might tighten credit to the consumer. Its a vicious cycle, which might lead India for hard landing. For Investment purpose, It will be difficult to gain returns in coming years as markets will loose ground and investor confident. Alternative to equity investment, FDs will beat the equities in coming years. Its a research note released by our team.

What RBI can do?

It is time for RBI to take the "ultimate weapon" by announcing sovereign bond issuance to the tune of not less than USD 20 billion; keep selling dollars in the market to take out excessive "long dollar" positions in the market and announce Rs 1 trillion of OMO bond purchases to absorb resultant rupee liquidity squeeze in the system.

What's the impact on the market?

RBI will have USD liability in its books at cost say 6.0-6.5% for 3-5 year tenor
RBI will add to rupee assets at yield 8.25-8.5% for 3-5 year tenor
USD/INR will sharply gain to 53.50 and get into consolidation mode at 52-53 considered as fair value factoring in extended dollar rally against global currencies
10Y Bond yield to settle around 8.20-8.35%; considered affordable borrowing cost for the Government
Open up expectation of rate cut for shift into aggressive growth supportive monetary stance
Don't see any other option at this stage to save rupee and to get positive vibes into the economy and markets. The end result is not important at this stage; the first aggressive step to prepare for soft-landing is important and critical.
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