August was horrible for the rupee. The market saw unprecedented volatility and the dollar-rupee touched an all-time high of 68.81.

Has the India-story gone terribly wrong?

How has the dream turned into a nightmare? It is important to understand this to find a way out of the current mess.

A look at what really went wrong.

Period 1: When things actually went wrong

India’s growth took a hit along with global growth after the US financial crisis struck in 2007. India’s growth fell to a low of 6.3 per cent in 2008.

The problem started when it recovered to 7.7 per cent in 2009, while global growth fell to -1.3 per cent.

And then the situation in India became really cocky, when it clocked 8.9 per cent in 2010, while the world managed only 4.5 per cent.

 Some random markers of “hubris” in 2010: Nifty hit high of 6339; Radia tapes leaked; Commonwealth Games held; Mukesh Ambani’s “Antilla” completed. 

Basically, India rested on its laurels during the “good” years of 2008-10.

Since money was spent on NREGA and not on infrastructure, India was unable to withstand the shock of the European crisis which intensified in 2010. India’s GDP fell relatively faster than world GDP after 2010 (Chart).   

Period 2: Wake Up! Danger Ahead!

India’s growth rate has seen an uptrend from the low of 2 per cent in 1991 till 2011.

But, with the 2012-13 GDP coming in at 5 per cent, the long-term growth uptrend line has been violated.

In fact, now that the 2013-14 Q1 GDP has come in at 4.4 per cent and the August Manufacturing and Services PMI has contracted, even 5 per cent might be a tad optimistic for 2013-14.

The currently projected 5.75 per cent growth for 2013-14 will be below the long-term trend.  A lot of hopes are pinned on a change of government in 2014. What if that does not happen?

What if 2014 growth falls below 5 per? What if world growth itself stalls at 3 per cent instead of rising to 3.9 per cent?

We have to be aware that India is now acutely vulnerable to adverse global developments.

 Yes, India 2013 cannot be compared to India 1991. Back in 1991, the Finance Minister Manmohan Singh was working to bring India out of a crisis.  But the Prime Minister Manmohan Singh is in a state of denial today.

He prefers to engage in blame games. He reminds us that he “commands a certain respect among the G20”.

He asks the developed countries to take the concerns of developing countries into account while framing their own domestic policies.  

We feel our neighbours are keenly aware of our increasing economic weakness which compounds our political weakness.  

China is already testing us with incursions. In case the UPA comes back to power and the 2014 growth rate falls below 5 per cent, there is a real danger of the country being invaded by its neighbours.

BUT, THERE’S HOPE

So, is there no good news? As optimists with faith in the markets, we note

the monsoons have been good;

exports may grow 15 per cent in August-September; and

FIIs may find equities very attractive between current levels and another 10 per cent lower, especially when combined with an already undervalued rupee.  

EXPECTATION OF 67.80

While we hope the country will not slip into a deeper crisis, there could be some more decline in equities and the rupee in the near term before a credible turnaround takes place.

Fibonacci projections made on the dollar-rupee chart suggest a possible target of 70.80-71.20 for dollar-rupee in September-October. We place a 60 per cent probability on this.

 However, there is a need to temper our immediate bearishness. We have to remember that the rupee has depreciated a lot in the last two months and is 17 per cent undervalued now.

The dollar is hugely overbought. As such, there is a 40 per cent chance that a high of 68.81 has been seen in August and the dollar can fall to 63. So, we expect 67.8 for September-October. And, even if it touches 71 in September-October, we could see a sharp reversal from there. 

(The author is Chief Currency Strategist at Kshitij Consultancy Services. The views are personal.)

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