Current Account Deficit Narrows.

During October-December 2006, India's current account deficit was lower at USD 3 billion as compared to USD 4.8 billion during the corresponding period of 2005. Doubling of inflows under net invisibles helped to narrow down the current account deficit even as trade deficit widened further during October-December 2006.

Imports surged by a hefty 25 per cent to USD 47.9 billion during October-December 2006. Exports, however, increased at lower rate of 14 per cent to USD 28.9 billion during the quarter. The faster expansion in imports as against exports resulted in the trade deficit widening to USD 19 billion during October-December 2006 as compared to USD 13 billion during the corresponding quarter of 2005.

Net invisibles receipts almost doubled to USD 16 billion during October-December 2006 as compared to USD 8.2 billion during the corresponding quarter of 2005. The increase was on account of sharp rise in invisibles receipts even as payments remained at almost the same level. Steady expansion in invisibles surplus reflected mainly the rise in software, professional and business services, and remittances from overseas Indians.

During October-December 2006, net capital inflows were considerably higher at USD 10.7 billion as against USD 0.4 billion during the corresponding quarter of 2005. The sharply lower inflows during October-December 2005 were on account of outflows due to repayments of India Millennium Deposits (USD 5.5 billion).

The major contributors to net capital inflows were external commercial borrowings, NRI deposits and other capital. Large inflows were recorded under foreign direct investment (USD 8.7 billion) but correspondingly outflows also remained significantly large (USD 6.4 billion) following the spate of foreign acquisitions by Indian corporates.

Liquidity Tightning.

The interbank call rates touched an intra-day high of 70 per cent on the last trading day of the financial year, signalling extreme liquidity tightness in the market, before closing at 30 per cent.

The market has been reeling under tight liquidity on the back of advance tax outflows of around Rs 40,000 crore and the RBI’s liquidity absorption measures.

Anticipating a depreciation of the spot rupee next week, most banks entered into sell-buy swaps by selling dollars to be bought next week anticipating a dollar appreciation. On the back of such swaps, the spot rupee opened at 43.67/68 but closed at a high of 43.47/48 to a dollar.

Weak Dollar!!

What is happening to the rupee?

An appreciation of close to two per cent in a span of five working days....and around double that in over a months time!

Has RBI stopped buying dollars from the open market, because the inflows are not as strong to result in a four per cent appreciation in the rupee against the greenback?

Ofcourse, the sharp appreciation in the rupee against the dollar will keep foriegn investors happy since besides the gain from appreciation in stock prices, FIIs also gain from an appreciation in Rupee. This is because for the same amount of rupees, currently invested, they stand to earn more dollars.

However, Indian IT companies wont like this sharp appreciation in rupee. Since they are exporters of services and earn their revenues in dollars, they will get less rupees for the same number of dollars compared to a month ago. Their margins will take a hit if the rupee appreciation continues.

here's a small and a very simplistic example:

- Company: Infy
- Size of order executed: USD 100 million
- Order finalised in say Feb: when the conversion rate was Rs.44.5 to a Dollar.
- Infy accordingly submits its quote, gets the order and executes the same.
- It stands to earn a 20% margin, ie. USD 20 million or if converted into INR (@ 44.5), Rs.89 crore.

- Suppose INR to a Dollar appreciates to Rs.42.8 (as is the case now). For its USD 20 million, Infy will now recieve (20,000,000 x 42.8) = Rs.85.6 crore or a loss of Rs.3.4 crore.


Watch out for a weakness in IT counters on the bourses. Infact, its not just the IT companies, but also garment exporters (Gokaldas, for eg)., and pharma companies.....

Daily Research Reports~ 29/03/07.

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28-03-07

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