R$ appreciating appreciation

No matter the current debate, think long term and the rupee emerges stronger. Give or take a few points, all predictions see the Indian currency consolidating its muscle in the next few years, or at not depreciating the way it did in the past decades.

By Kamya Jaiswal        Print Edition: September 6, 2007

No matter the current debate, think long term and the rupee emerges stronger. Give or take a few points, all predictions see the Indian currency consolidating its muscle in the next few years, or at not depreciating the way it did in the past decades. The rupee has zipped up nearly 10% in a year. What does this longer-than-anticipated haul mean? That as consumers and investors you just can’t dismiss this rise.

A brawny rupee is a mixed bag for stock investors. Exporting companies have sure taken a hit. The IT sector bills most clients in dollars. Naturally, their margins have shrunk too. Lower revenue in the balance sheet impacts stock value negatively.

Word's worthBut for every Infosys squirming over the strong rupee, there is a smiling Tata Steel. The Corus takeover payment is now cheaper for the giant. Jet Airways has less to pay for ramping up its fleet from abroad. Reserve Bank of India (RBI) governor YV Reddy recently said, “The exporters issue is probably projected so much partly for historic reasons but we should recognise that the exchange rate is an important issue for the economy.”

The message for investors is clear. If you are making short-term bets on companies with currency-linked earnings, you might need to re-strategise your investments. But don’t make a blanket decision for any particular sector. Every company has different competencies for hedging against currency losses. It’s best to evaluate each separately.

So far, an appreciating rupee has drawn in more investments from foreign institutional investors (FIIs). Higher dollar-returns on investments in Indian stocks than rupee-returns drove demand from FIIs and stock prices zoomed. That benefited every stock investor—big and small. If nothing very dramatic goes wrong in their countries, foreign investors love affair with corporate India should continue, bringing in more dollars. For those trying to make use of the overseas investment limit ($100,000), foreign mutual funds are now relatively cheaper than their domestic counterparts. But fixed deposits in foreign banks will give lower returns.

Even as consumers, there is much to make merry. Beginning with lower oil bills. Oil is the single largest import of the country. Had it not been for the cushion of a stronger rupee, monthly fuel charges would have left you a lot poorer. India Inc is on a massive investment drive. As imported capital goods become cheaper, costs will reduce. The benefits are likely to be passed on to customers in varying degrees. Imported goods have definitely become cheaper. Even products with a Made in India label but foreign components are cheaper.

The question is why this unshackled rise in the otherwise mellow rupee? Because the intention and ability of the RBI to contain it has been very limited. No wonder then that forecasts pitch the Indian currency in the range of Rs 40 (Economist Intelligence Unit) to Rs 42 (Goldman Sachs) a dollar by 2008. Temporary dips will be just that—temporary.

Funding Ideas

Funding coupled with mentoring is now within the reach of innovative start-ups through two initiatives. First is an online business development toolkit designed specially for small and medium enterprises (SMEs) and the second a network of 60 entrepreneurs and institutions that have banded together as angel investors.

The International Finance Corporation in collaboration with ICICI Bank and IBM has launched a free online SME toolkit (www.india.smetoolkit. org) that contains information on accounting and finance, human resources, legal and insurance, marketing, etc. These learning modules are also available as CDs and classroom training.

Delhi-based Indian Angel Network (formerly Band of Angels) has now launched its operations in Mumbai and Bangalore. It has already invested in sectors like information technology, hospitality and education among others. With several institutions like IBM, Naukri and Sidbi as members, these angel investors have the resources to provide not only money but also mentoring services for strategy and execution. The network looks at investing about $100,000 (approximately Rs 41 lakh) to $1 million, and exiting 3-5 years. So what’s stopping you from setting up your own business?

By Rajshree Kukreti

Housing Jitters

After the recent correction in the stock markets, you would probably have heard expressions like subprime loans, collateralised debt obligations (CDOs) and hedge funds. The fact is that even within the Indian financial sector these were until recently esoteric concepts and practices. Subprime mortgages refer to the practice of extending home loans to borrowers with relatively low credit standing.

For the lenders, the attraction is the higher interest rate they can charge (the more creditworthy you are the less will be your borrowing cost). But for banks and other lenders everywhere there is a trade-off between safety and return.

By Rakesh Rai

Telling figuresThe US subprime shake-out

1. A home buyer with bad credit history gets a mortgage from a subprime lender

2. Subprime lender sells loan and most of its risk to an investment bank. Uses proceeds of the sale to make another loan.

3. Investment banks repackage loan into mortgagebacked securities. Packages maybe sliced into risk tranches. Riskiest tranch offers highest yield.

4. Repackaging loans enables mortgage industry to aggressively move into the subprime market.

5. As subprime borrowers begind to default, the riskiest tranche looks even riskier for hedge fund investors.

6. Without fresh financing, banks cut off funding to subprime lenders.

In the US, subprime loans have helped more people buy homes. Lenders became more aggressive in the booming real estate market and spread the loan net wider.

As the housing market cools and interest rates soar, the number of defaulters rises, exposing the risks. The crisis can spread to mainstream US markets leading to further jitters.

How does this impact Indian investors? There is no subprime-mortgage market in India. But the IT sector, which has a large number of US financial companies as clientele, may be hit if the latter have to cut costs due to subprime setbacks.

Most analysts believe that in the short term, volatility will continue to affect the Indian markets. However, India Inc’s positive Q1 results, sustained consumption and stabilising interest rates will drive domestic growth. So hold on tight to your assets and ride out the storm.

Capital Flight

New locations are opening up for savvy investors. You can now save up to $100,000 (about Rs 41 lakh) a year in banks abroad and invest the money (and the interest earned on it) in mutual funds, venture funds, unrated debt securities, promissory notes and even purchase artworks in that country. Individuals may acquire and hold immovable property or buy other assets without any prior approval from the Reserve Bank of India (RBI).

The facility under RBI’s Liberalised Remittance Scheme (LRS) is in addition to those already available for private or business travel, studies, medical treatment, etc. The most exciting part is that the amount invested abroad can be consolidated in respect of different family members including minors. However, these remittances will not be allowed for margins or margin calls to overseas exchanges nor to countries like Nepal, Mauritius, Bhutan or those on the government’s list of “noncooperative” countries.

An individual must quote his Permanent Account Number (PAN) to avail the benefits. RBI has also clarified that the scheme will cover small remittances in the form of gifts and donations up to $5,000 (about Rs 2 lakh), implying there will be no separate limit for gifts and donations.

Rakesh Rai

Calling Home

Are international roaming rates dampening spirits ahead of a foreign jaunt? Country-specific SIM cards from Matrix and international calling cards by Hutch and Reliance should ease your worry. Passport Outroamer calling card by Reliance Communication and Home Calling card by Hutch are available through their retail outlets and range from Rs 500 to Rs 1,500. If you call India while visiting the US, you have to pay Rs 80 a minute by the roaming rate, but only Rs 5.50 a minute with the Reliance card.

The problem: these cards can’t be recharged. On the other hand, Matrix provides country-specific SIM cards. There is no security deposit to be paid (another disadvantage of the roaming system) and you get an itemised bill sent to you through email. The SIM is valid for as long as you need and the bills can be paid via credit card. An added advantage is that you will be able to receive incoming calls and also access SMS.

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