Last week, we wondered whether the Indian Rupee had stopped its waterfall decline and found a temporary bottom. A behavioral signal for that question was media over-hype. A more technical signal was a trend exhaustion pattern in the Indian Rupee and in U.S. interest rates. We wrote last week:
- “So we wouldn’t be surprised to see a period of stability return to the Indian Rupee and even a small rally from this past week’s deeply oversold condition. In full disclosure, we also expect stability and a fall in U.S. interest rates for at least a short period of time.”
Next day, we read similar arguments attributed to MacNeil Curry of BAC-Merrill Lynch . His basic argument was derived from trend exhaustion analysis and stated:
- “USDINR is showing signs of stalling. The Daily
Candlestick against weekly and daily channel resistance and bearish
momentum all point to a near term turn. WATCH US Treasuries. A break of
key resistance (2.802%/125-09) would likely be the catalyst for a move
constructive near term outlook for the Indian Rupee.”
This correlation between Indian Rupee and U.S. interest rates broke and broke hard on Tuesday, August 27. On that afternoon, 10-year Treasury yield broke down the 2.802% resistance and closed at 2.721%. But the Indian Rupee went the other way, with the ICN, the WisdomTree Rupee ETF, falling 2.3%.
Why did this correlation break in U.S. market hours on Tuesday afternoon? The catalyst was a hawkish speech by Secretary John Kerry, a speech that signaled U.S. military action against Syria. That sent oil prices shooting up by about 3%. And nothing is as negative for the Rs-$ rate as a steep rise in oil prices. India virtually imports all its oil and oil is priced in U.S. Dollars.
Predictably, the Indian Rupee suffered its steepest fall on Wednesday in India closing at 68.80. Obviously all India related entities opened lower & looked awful when the US markets opened on Wednesday. Then we saw the following tweet mid-morning on Wednesday:
- Michael Gayed @pensionpartners – India ETF $INP intraday kinda having a massive reversal
He was absolutely right. All Indian ETFs had stopped their fall and reversed to the upside. A day later, Jon Najarian of CNBC Fast Money reported that some institution had put on a massive bullish trade on EPI, an India ETF, that involved buying 1.125 million shares at $13.10. And the Rupee ETF also revered its morning decline and closed up on Wednesday. Predictably the Indian Rupee enjoyed its biggest one-day rally ever on Thursday in India. The rally in Rupee and Indian stocks continued until Friday with the Rupee closing at 65.71 for the week.
Dare we point out that such extreme volatility usually takes place at major tops or bottoms? Dare we argue that, after its massive fall since May 1, 2013, this volatility might be suggestive of a short term bottom in the Indian Rupee?
Yes, because the markets do exhibit signs of trend exhaustion. In fact, a DeMark buy signal was reported on Emerging Markets on Thursday morning. Yes, if the military action against Syria is surgical and oil prices fall or at least stabilize. Yes, if next week’s all important U.S. Nonfarm Payrolls report comes in weaker than expected. But all bets are off if either oil prices spike due to a military event or if the payroll report comes in much stronger than expected.
George Soros vs. Bank of England in 1992
The recent breaking of the Indian Rupee is reminiscent of September 1992 when George Soros broke the Bank of England & the British Pound and forced British Government’s ignominious exit from the European Exchange Rate Mechanism (ERM). That epic battle demonstrated conclusively that markets are bigger than central banks and market players like Soros can force central banks to change their erroneous ways. Soros reportedly made one billion dollars with his victory and that was when a billion dollars was real money.
The markets have been teaching a similar lesson to the Indian Government for the past couple of months. The lesson is that the Indian Government has been rampantly profligate in its spending and, like Soros, the market players have made big money by shorting the Indian Rupee. What should be obvious is that India needs much better financial management if India is to get out of its stagflationary low-growth trap.
That is clearly obvious to the Reserve Bank of India, at least to the outgoing RBI governor Subbarao. In his final lecture as the RBI Governor, Subbarao attributed the “sharp depreciation of the rupee over the last three months to the government’s failure to take care of domestic structural factors such as a high current account deficit (CAD)”:
- “The only lasting solution to India’s external sector problem, he said, was to reduce the CAD to its sustainable level and to finance the reduced CAD through stable, and non-debt flows.“
Clearly the RBI understands. We dare suggest that even the Oxford-PhD prime minister and Harvard-MBA finance minister understand these basic facts. So why can’t Indian Government change course like the Bank of England and British Government did in 1992?
An Existential Battle in India
The British Government understands that it exists to serve the British people. This is why they changed their course in 1992. In contrast, the current Indian Government understands very well that it exists to serve their master, the owner of the party who appointed them as ministers. Therefore this Indian Government acts in the best interests of their owner instead of acting to improve the lives of the Indian people.
The Owner of the ruling party, Italian-born Sonia Gandhi, faces an existential crisis. The future of her son and to a lesser extent her daughter & son-in-law depends on her winning the next election. We correctly call her the Owner because, following her example, political parties in India are becoming personal enterprises of a single leader and are being handed over to the leader’s heir in hereditary succession. The other reason is that Sonia owns/controls the treasury of her party and money is what makes a party in an electocracy.
The rising middle class in India is outraged about corruption and generally despises the Italian-born Sonia. With rising education and rising wealth, they are less and less enamored of family dynasties. Sections of the Indian media are in arms against the allegedly brazen deals that have made her son-in-law a very rich man in a very short period of time. So losing the next election means losing the power that protects her and her family from public wrath.
And Sonia is getting old and is reportedly in ill health. This could be the last election she can manage. And her son & heir is widely regarded as a light weight. So losing the next election could mean throwing him to the wolves.
In an existential crisis like this, noble and sane considerations like economic growth, well-being of people become utterly irrelevant. Witness what is happening in the obviously existential war between Alawite Assad and Sunni rebels in Syria. An electoral version of that war is being played in India. And like Assad, Sonia has more cards.
India is a dirt poor electocracy with about 650 million Indians without access to toilets or running water. Over 800 million Indians don’t know what a Dollar is and they don’t care a hoot about the Dollar-Rupee exchange rate. And frankly, they don’t really care whether their o
wner is Italian-born or native Indian. Their most prized possession is their vote and they understand their vote is the key to getting something from those who rule them.
Nobody understands this better than Sonia and she learned it from her mother-in-law Indira Gandhi, the best electoral politician of the last 65 years. Indira Gandhi taught Sonia the absolute appeal of being considered a protector of the poor, a person most likely to take care of the poor. This is why Sonia has forced the Indian Government to pass a massive spending bill that theoretically guarantees food to about 800 million Indians, a bill she trumpets as an unprecedented global achievement. This is her election platform and her vast network of politicians, activists and supporters will carry this savior of the poor message in the next election.
Does anyone think it matters whether the Rupee goes to 70/80 or even 100 in this battle? Does anyone think it matters whether the Indian economy grows by 2%, 4% or 6% between now and the next election? This is an existential battle for Sonia, her son, daughter and for the vast army of people who have become rich due to her political power and her money collection machine. Can you imagine the amount that can be plundered from her ambitious plan to deliver food to 800 million Indians when 40% of all such expenditures get “misplaced” in the supply chain that administers payments? If Sonia goes, they go and so go their avenues of making money.
The Indian electocracy is not British democracy. So don’t expect this Indian Government to act in the interests of the Indian economy. The government ministers themselves face the same existential battle that their owner faces.
So our case for stability in the Rupee is merely for the short or intermediate term. And how could it not be? The Rupee was 8 to the Dollar when we left India. Now it is 65-66. Need we say more?
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