India Crisis

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India Crisis

Postby Valuethinker » Fri Aug 23, 2013 5:44 pm

Many of you may have noticed the rupee is falling out of bed - India is having a crisis, how bad it is yet I certainly don't know.

In essence, Bernanke's comments about winding down Quantitative Easing kicked up US interest rates. And the flood of liquidity that had buoyed both debt and equity markets in Emerging economies began to reverse.

Candidates for trouble have, in the manner of all EM crises since the 1970s (actually since the 1870s if not earlier):

- current account deficits - domestic savings are less than domestic investment in fixed assets, therefore they import capital to pay their bills

- usually substantial government deficits

- significant borrowings in foreign currencies, so if a devaluation results, either/or the government borrower or the private sector borrowers are in deep do do having to repay debts which are worth far more in the local currency than when borrowed (note in aggregate India appears to have limited foreign currency debts)

India ticks all these boxes (except perhaps the last?). Turkey, Indonesia, Thailand also tick these boxes to varying degrees (Thailand was poster child for the Asia Crisis when it all began in 1997). Brasil also. I stress to varying degrees of severity, some will sail through clear. South Africa could be in trouble as well (plunging commodity prices etc.).

We had here, in the last 18 months, a number of posters who had:

- access to Indian bank accounts
- these accounts appeared to pay very high USD interest rates -- as high as 10%

[EDIT apparently I am incorrect, the accounts were rupee accounts (the USD accounts are with Chinese banks-- let's see how far this thing spreads, China is in a different place, but with a *massive* domestic bad loan problem). However Indian banks were also paying better than average USD rates as well, I believe0.

I wonder how all that is looking right now?


Implications for Investors

Those Indian bank accounts were paying high interest rates because they were risky. Indian financial institutions needed to borrow money at high rates, because the market had suspicions about India's macroeconomic policies (chronic corruption, bad infrastructure, unbalanced export sector, high barriers to manufacturing investment, c. 2-3% of national GDP is consumed just subsidizing domestic oil prices).

In other words there was no free lunch, no free money on the table, there was just risk.

Something to be remembered always in financial markets, and especially when chasing higher yield.
Last edited by Valuethinker on Sat Aug 24, 2013 12:36 pm, edited 1 time in total.
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Re: India Crisis

Postby foxfirev5 » Fri Aug 23, 2013 5:59 pm

Just another BRIC in the wall
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Re: India Crisis

Postby thomasbayarea » Fri Aug 23, 2013 6:08 pm

Valuethinker wrote:
We had here, in the last 18 months, a number of posters who had:

- access to Indian bank accounts
- these accounts appeared to pay very high USD interest rates -- as high as 10%

I wonder how all that is looking right now?


I did consider that some time ago, but based on Boglehead advice and my own research I decided not to go that route.

I have friends who did invest and they have obviously not done well at all.
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Re: India Crisis

Postby nisiprius » Fri Aug 23, 2013 6:34 pm

Yeah, here are some of those threads.

Oct. 2011: Chinese CDs "My friends do similar things in Indian banks which yield 9-10% They call it Fixed Deposit (FD) out there. Its similar to CD. I don't have information about FDIC type insurance but big banks have been stable. And yes its because there is 9% inflation that saving accounts and CDs yield so high."

March 21, 2012: Investing in Indian CDs for Indian Expats.

Aug 02, 2012: CDs with Indian banks? "I have done this and will be doing this as 9.25% is really good for one year." In that thread, the original poster in the March 2012 thread said "Against (boglehead) advice I went ahead and did this. Now I'm down 10% when considering the exchange rate :sad:".

July 26, 2013: Indian interest rates: 5 year CD at 8.5%

Here's a chart of the value of the rupee in dollars for the last three years:

Image
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Re: India Crisis

Postby baw703916 » Fri Aug 23, 2013 6:40 pm

The price of gold has also risen rather dramatically of late. I wonder if this is related.
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Re: India Crisis

Postby coldplay221 » Fri Aug 23, 2013 6:41 pm

ValueThinker's post is accurate. However, this could also be a matter of timing.

One of India's index mutual funds has its average 10 year returns at hold your breath 20% :dollar
http://www.morningstar.in/mutualfunds/f ... mance.aspx

$2200 invested in 2003 when the exchange rate was around 45 INR for the dollar would be $8052 on Thursday at 65 INR per dollar (after accounting for the absurd 1.82% expense ratio)
That is still a decent 14% return- given that long term cap gains are not taxed in that country.
Our VTSAX returned 8.3% during this time period.

However, if you reached out for the past 5 year average return rate - that is at 9.21%.
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Re: India Crisis

Postby abuss368 » Fri Aug 23, 2013 6:46 pm

For me this is another reason why we diversify with the Total International Stock Market Index fund rather than region specific funds.
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Re: India Crisis

Postby tyrionl » Fri Aug 23, 2013 8:07 pm

One thing to note is that the 9-10% interest rates were never offered in USD denominated deposits. They were offered in Rupee deposit accounts only. And as someone already pointed out, the main reason for these higher rates was inflation which runs quite high. In fact, the 9-10% rates in all probability represent a negative real return against consumer inflation (9.6% as last reported, but anecdotally considered quite a bit higher).

Deposits denominated in non-rupee currencies earn returns that are quite a bit lower. Right now, they are paying about 2.7% for a 1-2 year deposit, and 3.56% for a 5 year or higher deposit. (see http://www.icicibank.com/nri-banking/RH ... s.html#T-5).

So net-net folks who went for the 10% rates without understand the currency risks got badly hosed.
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Re: India Crisis

Postby samboise » Fri Aug 23, 2013 10:34 pm

Indian rupee held up well for a long time though there is a significant difference in inflation levels between US and India. Presumably that was so because of all the foreign investments moving into the country. That may have temporarily helped Rupee look stronger than it really should have been. India has seen higher inflation the last few years (http://www.inflation.eu/inflation-rates/india/historic-inflation/cpi-inflation-india.aspx) where as the US inflation was pretty low. So if you go back about ten years and add up all the Rupee decpreciation (against USD) that didn't happen, Rupee may be in 70s per US Dollar, IMO. So it's really catch up time, if you ask me.
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Re: India Crisis

Postby rr2 » Fri Aug 23, 2013 11:28 pm

Valuethinker wrote:We had here, in the last 18 months, a number of posters who had:

- access to Indian bank accounts
- these accounts appeared to pay very high USD interest rates -- as high as 10%

I wonder how all that is looking right now?

Implications for Investors

Those Indian bank accounts were paying high interest rates because they were risky. Indian financial institutions needed to borrow money at high rates, because the market had suspicions about India's macroeconomic policies (chronic corruption, bad infrastructure, unbalanced export sector, high barriers to manufacturing investment, c. 2-3% of national GDP is consumed just subsidizing domestic oil prices).

In other words there was no free lunch, no free money on the table, there was just risk.

Something to be remembered always in financial markets, and especially when chasing higher yield.


Very true. I was one of the posters with access to these accounts. Luckily, I only put a very tiny amount (about USD 2K).
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Re: India Crisis

Postby bpp » Sat Aug 24, 2013 6:21 am

nisiprius wrote:Here's a chart of the value of the rupee in dollars for the last three years:

Image


A 50% swing over the course of 3 years? Yawn. Yen/dollar has done that more than once in the last couple of decades, in both directions.

This is why currency diversification can be valuable. Nothing new here.
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Re: India Crisis

Postby Ranger » Sat Aug 24, 2013 7:16 am

All good points from Valuethinker. But as some one pointed out India never paid high interest rates in dollar deposits. If one had taken into account country and bank credit risk, it would have been wash.

What is more interesting is the behavior of AAA rated Aussie and Japanese currencies for the possible ending of QE. Aussie has lost around 15% in 4 months. (other reasons: Aussie is lot more tied to Chinese economy and commodity, along with Japanese selling aussie, slowing domestic growth and possible int. rate reduction).

Rupee movement pales into comparison with these AAA rated currencies.

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Re: India Crisis

Postby JoMoney » Sat Aug 24, 2013 7:51 am

I've been watching the Aussie dollar drop first hand. The Reserve Bank of Australia lowered interest rates in May 2013, coinciding with the drop on your chart.
They're hoping to boost trade, and bring back jobs. Australia coasted through the GEC pretty well, but leaving the Aussie dollar high has hurt the economy. Strong dollar buys lots of cheap imported goods, at the cost of domestic jobs going away.
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Re: India Crisis

Postby aaplhpq » Sat Aug 24, 2013 11:13 am

Agree with OP.

I'm an immigrant from India, and had a bit of skin in the entire Indian CD/FD paying 10%. This was pre-boglehead days and I'm really happy to have pulled out and learned the lesson in a relatively inexpensive way. From my other posts, these are the other issues with Indian CDs

Don't do this!

I'm of Indian origin, and learned a small lesson a hard way. I transferred $10k money to India when $1 = Rs 45. By the time I pulled it out it was Rs 55, and this was just before the Rupee slid and hit ~60. I got lucky.

Here are the problems
1) Currency risk - This is no better than currency speculation. You should plan what you'll do when the Rupee hits Rs 80 = $1 (which is quite possible)
2) Country/political/social risk - You'd much rather take this risk on the equities side rather than on fixed income side
3) Tax issues in the US - 1) You need to file FBAR when $ outside the US is > $10,000. 2) The income from the India CD is taxes at ordinary income rates.
4) Indian banks - Don't expect the same type of response rates, customer service that you'd expect from US banks
5) Insurance - AFAIK, the deposits are covered by the Indian government for upto only $2500 or so. Moreover the credit rating of India itself is around BBB. So you are taking on much higher risk
6) You can't tax loss harvest, or write off losses against your US income (which you can do with US based equities).

This is a horrible way to "invest"

I think India will eventually develop and have a high growth rate, but I'd rather take the development risk on the equity side than on the fixed income side.
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Re: India Crisis

Postby momar » Sat Aug 24, 2013 11:21 am

I find this thread interesting not really because of India, per se, but because of the fact that most people look back at the interest rates in the late 70s/early 80s and wonder how people didn't lock in to long CDs pay 10+%, given that it seems like an obvious no brainer (since we already know what happened starting in the mid 80s!).
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Re: India Crisis

Postby Valuethinker » Sat Aug 24, 2013 12:24 pm

tyrionl wrote:One thing to note is that the 9-10% interest rates were never offered in USD denominated deposits. They were offered in Rupee deposit accounts only. And as someone already pointed out, the main reason for these higher rates was inflation which runs quite high. In fact, the 9-10% rates in all probability represent a negative real return against consumer inflation (9.6% as last reported, but anecdotally considered quite a bit higher).

Deposits denominated in non-rupee currencies earn returns that are quite a bit lower. Right now, they are paying about 2.7% for a 1-2 year deposit, and 3.56% for a 5 year or higher deposit. (see http://www.icicibank.com/nri-banking/RH ... s.html#T-5).

So net-net folks who went for the 10% rates without understand the currency risks got badly hosed.


Tyrionl

Thank you for that.

In the case of the Icelandic banks-- Kaupthing and Landsbanki, they were paying 8% rates on their UK internet savings accounts (so pound sterling accounts) when interest rates paid by Barclays et al were 5%. And Northern Rock (which was nationalized) was paying c. 6-7%.

When Iceland went into meltdown, Kaupthing and Landsbanki went with it (in fact they more or less caused it). It then developed that deposit insurance was provided by the Icelandic government, not the UK government (up to £32k as it was then). Since these were UK bank accounts, it was assumed by everyone that it would be the UK deposit insurance scheme that would step in-- but in the case of one of the two mentioned above, not so.

ICIC an Indian bank in the UK has also been paying high GBP pound sterling account rates, btw.

Local councils in London and other places lost £10s of millions of £s. Over £2bn in total. After several years of negotiation, in which the Icelandic government basically refused to take responsibility for the risky policies of the Icelandic banks, I believe the UK government is now making good the losses.

But it's an important lesson. FDIC is OK, although you can lose interest if the bank is seized-- your risk is that your guaranteed rate of interest is not guaranteed (as I understand it). But FDIC is safe.

But financial institutions pay over the odds interest rates because they are having trouble funding themselves. Don't ignore what the market is telling you.

(there are anomalies, eg Penfed -- not ALL situations are dangerous, but in the words of the late Michael Conrad (Detective Sergeant Phil Esterhaus in 'Hill Street Blues'

'And heh, let's be careful out there'.

http://www.youtube.com/watch?v=Jmg86CRBBtw
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Re: India Crisis

Postby William Million » Sat Aug 24, 2013 12:27 pm

The Indian ETFs seem to be down about 20-30% on the year. Not enough of a drop for me - I buy emerging markets when they are down at least 70%.
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Re: India Crisis

Postby Valuethinker » Sat Aug 24, 2013 12:28 pm

Ranger wrote:All good points from Valuethinker. But as some one pointed out India never paid high interest rates in dollar deposits. If one had taken into account country and bank credit risk, it would have been wash.


Let's see where this plays out before assuming that Indian banks (in any currency) are safer than Australian or Japanese, or that the Rupee will not fall more than either of those currencies did.

This is the first round of a 1997 style meltdown. It MAY stop before it gets there.

India has low foreign currency debts (this is very good). But it does have:

- large 'hot money' ie international portfolio investment has been flooding in for years. It can flood out again *very* quickly-- this is just like Asia 1997 in that respect

- relatively short term government debt, and thus a need to 'roll' a large proportion of its existing debt (exactly the problem that Spain Portugal Greece all face). That means the *gross* requirement of new foreign borrowing is quite high. It is conceivable that the *net* borrowing by the Indian government and Indian corporations from abroad could be negative (more debt repaid than newly borrowed).

If that foreign lending is not forthcoming, then India will need to impose stiff exchange controls, plus sharp cuts in government spending. Bank depositors watch out.
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Re: India Crisis

Postby Valuethinker » Sat Aug 24, 2013 12:30 pm

samboise wrote:Indian rupee held up well for a long time though there is a significant difference in inflation levels between US and India. Presumably that was so because of all the foreign investments moving into the country. That may have temporarily helped Rupee look stronger than it really should have been. India has seen higher inflation the last few years (http://www.inflation.eu/inflation-rates/india/historic-inflation/cpi-inflation-india.aspx) where as the US inflation was pretty low. So if you go back about ten years and add up all the Rupee decpreciation (against USD) that didn't happen, Rupee may be in 70s per US Dollar, IMO. So it's really catch up time, if you ask me.


In all the time I have seen foreign exchange markets I have never seen them merely 'catch up'.

Almost without exception, they overshoot (Dornbusch had a famous paper on this).

Look for an overshoot.

And capital flows drive exchange rates *not* relative rates of inflation. Purchasing Power Parity holds only in the very long term (if at all) in a world of free capital movements as post Bretton Woods (ended 1971). India has had huge foreign portfolio inflows.

The messy interaction is with India's need to 'roll' its US dollar debt, and the outflow of foreign portfolio capital. This could get messy.
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Re: India Crisis

Postby Valuethinker » Sat Aug 24, 2013 12:30 pm

baw703916 wrote:The price of gold has also risen rather dramatically of late. I wonder if this is related.


Biggest retail buyers in the world are Indians. It is a traditional store of wealth (gold and gold jewelry). So quite possibly, yes.
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Re: India Crisis

Postby Valuethinker » Sat Aug 24, 2013 12:31 pm

coldplay221 wrote:ValueThinker's post is accurate. However, this could also be a matter of timing.

One of India's index mutual funds has its average 10 year returns at hold your breath 20% :dollar
http://www.morningstar.in/mutualfunds/f ... mance.aspx

$2200 invested in 2003 when the exchange rate was around 45 INR for the dollar would be $8052 on Thursday at 65 INR per dollar (after accounting for the absurd 1.82% expense ratio)
That is still a decent 14% return- given that long term cap gains are not taxed in that country.
Our VTSAX returned 8.3% during this time period.

However, if you reached out for the past 5 year average return rate - that is at 9.21%.


That's equity.

I am talking about debt (ie bank deposits).
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Re: India Crisis

Postby Valuethinker » Sat Aug 24, 2013 12:34 pm

momar wrote:I find this thread interesting not really because of India, per se, but because of the fact that most people look back at the interest rates in the late 70s/early 80s and wonder how people didn't lock in to long CDs pay 10+%, given that it seems like an obvious no brainer (since we already know what happened starting in the mid 80s!).


You could have locked in those interest rates though with FDIC insurance, or by lending to the US government (Treasury Bonds).

This is rather different. There is default risk or its stepbrothers, exchange controls.

The new banking jargon btw is 'bail in'. The depositors in Cypriot banks are 'bailing in' aka losing 60% of their deposits (for depositors with over 100k Euros).
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Re: India Crisis

Postby Valuethinker » Sat Aug 24, 2013 12:39 pm

William Million wrote:The Indian ETFs seem to be down about 20-30% on the year. Not enough of a drop for me - I buy emerging markets when they are down at least 70%.


If I was the Indian government I would not again allow such foreign portfolio inflows-- too destabilizing. China, for one, heavily restricts same.

Although they have said they will *not* impose controls on outflows, I think they will have to-- once these avalanches start, they don't stop easily. Malaysia did so in 1997 (in defiance of all economic advice and conventional wisdom) and it worked.

It's part of the orthodox IMF toolkit now that when it hits the fan and the IMF is brought in, you impose exchange controls to stop mass capital flight.
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Re: India Crisis

Postby ourbrooks » Sat Aug 24, 2013 4:28 pm

In the past, the Indian government had a strong policy against foreign investment, because of their fears that repatriation of profits would worsen their foreign exchange situation and because of their belief that foreign investment would lead to more foreign control. Coca Cola was kept out of India for decades, even though most bottlers are local franchises.

Since the early 1980's, Western free market "experts" have advised the Indian government that accepting foreign capital was the way to grow. Alas, the Indian government listened to those experts, just like they listened to foreign development efforts in the 1950s and built steel mills.

Gee, whiz, it now turns out that unlimited foreign inflows of capital (and subsequent outflows) are a bad idea. Who woulda thought? Anyone care for a Campa Cola?
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Re: India Crisis

Postby nedsaid » Sat Aug 24, 2013 4:42 pm

India has a lot of strengths that should not be forgotten.

A large part of its population speaks English. A growing middle class. A Democracy that has worked well enough. A growing base of skilled high tech workers and engineers. A young and growing population. Many well educated people. The country has big problems but also many great things going for it.

These money flows back and forth work themselves out over time. At some point, people will see value in India and Emerging Markets again and monies will flow back in.

This is a textbook example of why Emerging Markets are potentially very profitable but carries big risks as well. Volatility is what these markets do.

My gosh Europe pretty much died a couple years ago and Western Civilization came to an end. Oh wait a minute, isn't Europe coming back? I suspect this is true for Emerging Markets. Someday people will be saying what opportunities there were in 2013 in Emerging Markets. So this might be a good rebalancing opportunity.
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Re: India Crisis

Postby Valuethinker » Sat Aug 24, 2013 4:45 pm

nedsaid wrote:India has a lot of strengths that should not be forgotten.

A large part of its population speaks English. A growing middle class. A Democracy that has worked well enough. A growing base of skilled high tech workers and engineers. A young and growing population. Many well educated people. The country has big problems but also many great things going for it.

These money flows back and forth work themselves out over time. At some point, people will see value in India and Emerging Markets again and monies will flow back in.

This is a textbook example of why Emerging Markets are potentially very profitable but carries big risks as well. Volatility is what these markets do.

My gosh Europe pretty much died a couple years ago and Western Civilization came to an end. Oh wait a minute, isn't Europe coming back? I suspect this is true for Emerging Markets. Someday people will be saying what opportunities there were in 2013 in Emerging Markets. So this might be a good rebalancing opportunity.


This is not about whether India is doomed or not-- it's not clear as yet how bad this crisis will get (remembering 1997 I fear the worst, but there are some things which are different). It has a lot of strengths in the long term, anyone who has been there would see that.

This is about whether there are 'safe' ways to 'juice' the yield on your deposits (and otherwise boost fixed income returns).

And the answer is: most likely no. If it pays a higher return it's because it has a higher risk.
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Re: India Crisis

Postby Valuethinker » Sat Aug 24, 2013 4:47 pm

ourbrooks wrote:In the past, the Indian government had a strong policy against foreign investment, because of their fears that repatriation of profits would worsen their foreign exchange situation and because of their belief that foreign investment would lead to more foreign control. Coca Cola was kept out of India for decades, even though most bottlers are local franchises.

Since the early 1980's, Western free market "experts" have advised the Indian government that accepting foreign capital was the way to grow. Alas, the Indian government listened to those experts, just like they listened to foreign development efforts in the 1950s and built steel mills.

Gee, whiz, it now turns out that unlimited foreign inflows of capital (and subsequent outflows) are a bad idea. Who woulda thought? Anyone care for a Campa Cola?


Conversely it is very difficult for foreign companies to make direct investments into businesses in India: build factories, open stores etc. The 'license Raj' is still there in terms of the national preferences and barriers to foreign companies. India remains quite a closed economy.

This is almost the reverse of China. It's easy for companies to invest in China and build facilities, open up businesses etc. However portfolio investment is restricted.
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Re: India Crisis

Postby Ranger » Sat Aug 24, 2013 4:57 pm

Valuethinker wrote:
Ranger wrote:All good points from Valuethinker. But as some one pointed out India never paid high interest rates in dollar deposits. If one had taken into account country and bank credit risk, it would have been wash.


Let's see where this plays out before assuming that Indian banks (in any currency) are safer than Australian or Japanese, or that the Rupee will not fall more than either of those currencies did.


I did not mean Rupee is safer than Yen or Aussie. What i meant was, if AAA rated currencies can move 50% or 70% then it was no big deal for BBB rated currency to move 40%.
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Re: India Crisis

Postby Valuethinker » Sat Aug 24, 2013 5:07 pm

Ranger wrote:
Valuethinker wrote:
Ranger wrote:All good points from Valuethinker. But as some one pointed out India never paid high interest rates in dollar deposits. If one had taken into account country and bank credit risk, it would have been wash.


Let's see where this plays out before assuming that Indian banks (in any currency) are safer than Australian or Japanese, or that the Rupee will not fall more than either of those currencies did.


I did not mean Rupee is safer than Yen or Aussie. What i meant was, if AAA rated currencies can move 50% or 70% then it was no big deal for BBB rated currency to move 40%.


I can't think of, in a short period of time, any of the world's big currencies have moved that far against each other.

Say 12 months

CAD
AUD
USD
GBP
EUR

I would guess the max move is c. 30%. Thinking really big events like:

- Plaza Agreement September 1985 when dollar starts its long plunge
- UK exits the EMU (precursor to the Euro) on 'Black Wednesday' September 1992

Now if you had Quebec voting for independence, or Julia Gillard becoming head of the Liberal Party (;-), or Spain exiting the Euro, then all bets are off.
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Re: India Crisis

Postby nedsaid » Sat Aug 24, 2013 5:13 pm

I have seen the currency risks in my own portfolio. One International Bond fund I own is down 6.5 percent. Another that has some emerging market bonds in it is down almost 1.9%. The one down 6.5% has mostly European and Japanese bonds. I own these funds to further diversify my portfolio and to give me currency diversification. I have not owned them to chase yield. These funds are about 8% of my fixed income portfolio.

I certainly would not chase CD yields in a single country like India. Currency risks are big enough in diversified bond funds which are diversified over many countries. A one country strategy of chasing high interest rates in India seems very risky. For someone spending time in both the US and India, this might make sense. For an american citizen chasing high yields, this is an unnecessarily risky strategy.
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Re: India Crisis

Postby bpp » Sat Aug 24, 2013 8:44 pm

Valuethinker wrote:
Ranger wrote:
Valuethinker wrote:
Ranger wrote:All good points from Valuethinker. But as some one pointed out India never paid high interest rates in dollar deposits. If one had taken into account country and bank credit risk, it would have been wash.


Let's see where this plays out before assuming that Indian banks (in any currency) are safer than Australian or Japanese, or that the Rupee will not fall more than either of those currencies did.


I did not mean Rupee is safer than Yen or Aussie. What i meant was, if AAA rated currencies can move 50% or 70% then it was no big deal for BBB rated currency to move 40%.


I can't think of, in a short period of time, any of the world's big currencies have moved that far against each other.

Say 12 months

CAD
AUD
USD
GBP
EUR

I would guess the max move is c. 30%. Thinking really big events like:

- Plaza Agreement September 1985 when dollar starts its long plunge
- UK exits the EMU (precursor to the Euro) on 'Black Wednesday' September 1992

Now if you had Quebec voting for independence, or Julia Gillard becoming head of the Liberal Party (;-), or Spain exiting the Euro, then all bets are off.


Just looking at the last 5 years on oanda.com (which is as far back as their charts go):

EUR/JPY went from 161 to 116 between 8/25/2008 and 2/2/2009.
That's a change of either -28% or +38%, depending on which side of the trade one was sitting.

It then went from 95 to 132 between 7/23/2012 and 5/13/2013, a change of +39% or -28%.

USD/JPY went from 78 to 102 between 9/24/2012 and 5/20 2013, +31% or -24%.

AUD/JPY went from 94 to 58 between 8/25/2008 and 2/1/2009, -38% or +62%.

In the same time period, GBP/JPY went from 201 to 126: -37% or +60%.

You may say the last 5 years have been special, but really, swings of such magnitude are common.
Maybe not always within 12 months, but within a small number of years.
USD/JPY went from 140 to 80 and back to 140 over the course of about 10 years in the '90s (roughly -- don't remember the exact dates), and has had similar sized swings since 2000.

I agree that this shows the folly of chasing yield in foreign currencies, especially in an undiversified, short-term manner.

But I think the real lesson is to show the value of wide currency diversification -- you never know when your home currency will be the next rupee (or, depending on the time frame in question, the next EUR, USD, AUD, GBP or JPY).
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Re: India Crisis

Postby Ranger » Sat Aug 24, 2013 10:05 pm

Valuethinker wrote:I can't think of, in a short period of time, any of the world's big currencies have moved that far against each other.

Say 12 months

CAD
AUD
USD
GBP
EUR

I would guess the max move is c. 30%. Thinking really big events like:


It is a fruitless exercise. Hey, it is a weekend. I just put my little one to sleep, after reading her favorite princess story.

Here you go. I am just looking from last 15 years.

USDJPY:
Apr 99 -Mar 00 ----31%
EURUSD:
July 99 - May 00---29%,
Sept 99-Sept 00---35%
Oct99-Oct 00------41%
Jun 02- Jun03------47%
USDCHF:
Sept99-Sept00------34%
Oct99-Oct00--------35%
Jun01-Jun02-------30%
Feb02-Feb03-------43%
Apr07-Mar08-------38%
AUDUSD:
Oct99-Oct00-------38%
Jan00-Jan01-------40%
Jul02-Jul03---------31%
Jan03-Jan04--------48%
Nov06-Nov07-------33%
Nov07-Nov08--------47%
Mar08-Mar09---------55%
USDCAD:
Nov06-Nov07--------33%
AUDJPY:
Oct07-Oct08---------59%
Feb00-Jan01-------52%
CADJPY:
OCt07-Oct08----49%
GBPJPY:
Dec07-Dec08----57%
GBPUSD:
Nov07-Nov08------46%
Mar08-Mar09------56%

You get the picture. I stopped counting after 2009, where Aussie came back violently. My point was Rupee was relatively stable for its BBBrating during that period.
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Re: India Crisis

Postby Valuethinker » Sun Aug 25, 2013 10:27 am

BPP and Ranger

Thanks for the correction and digging out the data. Bigger than I had remembered-- although see my spot check of Ranger's data. Does confirm my thoughts about 'overshooting' because there is no way economic fundamentals justified this.

I've been a spectator and unwilling participant to a few EM crashes, and 60-80% currency moves are not impossible. We shall see how far India goes down on this.

I do remember the day the Yen, during the Asia Crisis, went up +14% against USD.

The BBB rating in and of itself makes me jumpy-- it implies real default risk (only one rating point above junk).

The countries that are in this are suggested to be India, Turkey, Indonesia, Brasil, Thailand. We'll see how far this one runs. That deadly word 'contagion' is a big factor in international currency crises.

Everyone is denying:

- that the IMF will get involved
- that India will have to impose exchange controls
- that Indian companies and or financial institutions (many of which are government owned) will be in trouble
- that this is really a crisis

This all makes me very nervous, because it repeats a pattern I have seen again and again, most recently in the Eurozone with Greece, Cyprus, now Portugal. Reschedulings which are 'impossible' have a way of becoming inevitable quite quickly. Note also the debt position of Spain and Ireland did not look bad before this thing happened-- the fiscal positions of their governments (and Iceland) were quite good due to revenues buoyed up by the economic boom.

It's quite difficult for a country that is so subject to commodity prices (because it is a big importer of fuel and food, and people *starve* if it gets that wrong) to simply devalue without big knock on effects. To be fair, apparently the monsoon has been good, maybe this can happen without starvation (God, or Vishnu or whoever, is looking out for someone).

If you look at the Indian boom, it has been lopsided, and again almost the negative mirror of China:

- small but robust IT and outsourcing sector (a big chunk of Indian exports and invisible earnings)-- an industry where India is world competitive or world leader
- domestic spending boom around property and property related investing

all financed by a current account deficit. This looks a lot like SE Asia in 1997 and not China (until the last 2-3 years at least).
Last edited by Valuethinker on Sun Aug 25, 2013 10:46 am, edited 1 time in total.
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Re: India Crisis

Postby Valuethinker » Sun Aug 25, 2013 10:30 am

Ranger wrote:GBPUSD:
Nov07-Nov08------46%
Mar08-Mar09------56%

You get the picture. I stopped counting after 2009, where Aussie came back violently. My point was Rupee was relatively stable for its BBBrating during that period.


Ranger. Those numbers appear to be incorrect.

They would imply the pound went from GBP/ USD 2.00 to c. 1.08 (-46%) and c. 92 cents in the second case. In 12 months.

However whilst the pound has been as high as 2.20, it is now about 1.60-- so it's dropped about -33% in the last 10 years.

EDIT

Your first problem is you have used overlapping date series. Since they are not independent samples, we can't really use them both to make a point.

GBP/ USD rates (from x-rates.com)

1/Nov/2007 2.08
1/Nov/ 2008 1.616

per cent change = (last-first)/ first = -22.3%

1/Mar/ 2008 1.987
1/Mar/ 2009 1.427501

per cent change = (last-first)/ first = -28.1%
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Re: India Crisis

Postby bpp » Sun Aug 25, 2013 10:43 am

Valuethinker wrote:BPP and Ranger

Thanks for the correction and digging out the data. Bigger than I had remembered. Does confirm my thoughts about 'overshooting' because there is no way economic fundamentals justified this.

BPP note you say 'depending on which side you are'-- that's not possible, the move is the move, mathematically?


By that I meant if, for example, one were a Japanese investor holding pounds sterling when GBP/JPY went from 201 to 126, then one saw a loss of 37%. But if one were a British investor holding yen, then one saw a gain of 60%. So the percentage change depends on where one sets the starting-point. (I.e., the same absolute change in exchange rate becomes different relative changes depending on which currency the change is viewed from.)

Make sense?
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Re: India Crisis

Postby Valuethinker » Sun Aug 25, 2013 10:48 am

bpp wrote:
Valuethinker wrote:BPP and Ranger

Thanks for the correction and digging out the data. Bigger than I had remembered. Does confirm my thoughts about 'overshooting' because there is no way economic fundamentals justified this.

BPP note you say 'depending on which side you are'-- that's not possible, the move is the move, mathematically?


By that I meant if, for example, one were a Japanese investor holding pounds sterling when GBP/JPY went from 201 to 126, then one saw a loss of 37%. But if one were a British investor holding yen, then one saw a gain of 60%. So the percentage change depends on where one sets the starting-point. (I.e., the same absolute change in exchange rate becomes different relative changes depending on which currency the change is viewed from.)

Make sense?


OK thank you. The normal practice, I believe, is to quote XR with the larger currency first, and to take the percentage change from that. (that also means the GBP is always first, which dates back to when the British Empire ruled the world ;-). In fact a Sterling-Dollar transaction is still called a 'Cable' after the undersea telegraph).
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Re: India Crisis

Postby Valuethinker » Sun Aug 25, 2013 10:53 am

http://krugman.blogs.nytimes.com/2013/0 ... anic/?_r=0

puts the case why I am panicking unecessarily. The comments don't add a lot of insight I didn't think. But they did raise the twin issues of

- private sector borrowing
- the short term of Indian government debt (the roll problem)

I still think my basic point, that it is unlikely that you will find 'free wins' by putting money in the accounts of offshore financial institutions, is a valid one.
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Re: India Crisis

Postby lws6772 » Sun Aug 25, 2013 10:55 am

momar wrote:I find this thread interesting not really because of India, per se, but because of the fact that most people look back at the interest rates in the late 70s/early 80s and wonder how people didn't lock in to long CDs pay 10+%, given that it seems like an obvious no brainer (since we already know what happened starting in the mid 80s!).
2007 - 6.25% APY for 7 years, one more year to go. :D
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Re: India Crisis

Postby Ranger » Sun Aug 25, 2013 12:29 pm

I used this as quick and dirty analysis tool. It is an based on currency index not on exact currency cross.
http://stockcharts.com/freecharts/perf. ... p%2C%24usd

This is the snap shot from Mar 08 thru Mar 09.
Image

Here is the exact currency cross data.

Image

From the exact currency cross data:
based on your requirement of data rolling window of 1 year or less, on Mar 14, 2008 High tick was 2.0395 and on Jan 23, 2009 low tick was 1.3501

Performance based one is short or long is -33.80% or +51.06% (edit: similar to bpp explaination)
Last edited by Ranger on Sun Aug 25, 2013 2:54 pm, edited 2 times in total.
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Re: India Crisis

Postby reggiesimpson » Sun Aug 25, 2013 2:49 pm

Great exchange rate. I'm outta here.
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Re: India Crisis

Postby Valuethinker » Sun Aug 25, 2013 5:06 pm

Ranger and BPP

Thanks for your data and explanations. I had underestimated XR volatility to an extent.
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Re: India Crisis

Postby prudent » Wed Aug 28, 2013 8:04 am

Saw this morning that the Rupee is down 22% against the US Dollar in 4 months. I don't follow forex much - would that be considered a meltdown-size drop, or just a "significant" change?
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Re: India Crisis

Postby Chan_va » Wed Aug 28, 2013 10:30 am

prudent wrote:Saw this morning that the Rupee is down 22% against the US Dollar in 4 months. I don't follow forex much - would that be considered a meltdown-size drop, or just a "significant" change?


Forex volatility is somewhere between 4-10x S&P volatility. So, you could equate a 22% drop in forex to somewhere between a 2-5% drop in the S&P over 4 months. I don't know if this even qualifies as significant change.
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Re: India Crisis

Postby Skyler » Sat Aug 31, 2013 7:54 am

tyrionl wrote:One thing to note is that the 9-10% interest rates were never offered in USD denominated deposits. They were offered in Rupee deposit accounts only. And as someone already pointed out, the main reason for these higher rates was inflation which runs quite high. In fact, the 9-10% rates in all probability represent a negative real return against consumer inflation (9.6% as last reported, but anecdotally considered quite a bit higher).

Deposits denominated in non-rupee currencies earn returns that are quite a bit lower. Right now, they are paying about 2.7% for a 1-2 year deposit, and 3.56% for a 5 year or higher deposit. (see http://www.icicibank.com/nri-banking/RH ... s.html#T-5).

So net-net folks who went for the 10% rates without understand the currency risks got badly hosed.


+ 1.

Feel like INR-USD is finally catching up on inflation difference between India & US. Would be good to see a comparison graph of INR-USD vs Inflation differential - to see how much more correction is due.
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Re: India Crisis

Postby rr2 » Sat Aug 31, 2013 9:41 am

Skyler wrote:Feel like INR-USD is finally catching up on inflation difference between India & US. Would be good to see a comparison graph of INR-USD vs Inflation differential - to see how much more correction is due.

Somewhat along those lines but also connected to purchasing power parity (PPP), here is a news article from a couple of years ago.

http://www.thehindubusinessline.com/opi ... 540678.ece

This is from the Economic Survey 2010-2011.

ADJUSTING FOR PARITY

This time's Chapter 2 discusses, among other things, the concept of ‘PPP catch-up inflation' (p. 27). Now, the idea of PPP or purchasing power parity per se is simple. A $ 100 note is exchangeable today at around Rs 4,500. But with Rs 4,500, you can buy more goods and services in India than with $100 in the US.

...

Does inflation result from PPP levels aligning themselves closer to market-determined exchange rates? Or, is it just the other way round, wherein inflation is a cause rather than effect of PPP catch-up? The Basu formulation — an adaptation of the so-called Balassa-Samuelson effect — seemingly presumes PPP catch-up to be the causal variable, which necessarily engenders inflation.


A PDF format of Chapter 2 is available at

http://indiabudget.nic.in/budget2011-20 ... hap-02.pdf

Should be an exciting read :)
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Re: India Crisis

Postby jimkinny » Sun Sep 01, 2013 11:49 am

Valuethinker wrote:http://krugman.blogs.nytimes.com/2013/08/20/rupee-panic/?_r=0

puts the case why I am panicking unecessarily. The comments don't add a lot of insight I didn't think. But they did raise the twin issues of

- private sector borrowing
- the short term of Indian government debt (the roll problem)

I still think my basic point, that it is unlikely that you will find 'free wins' by putting money in the accounts of offshore financial institutions, is a valid one.


Valuethinker, when I first read your post, I had just finished reading Krugman's blog (thanks for introducing me to his blog). Your link reminded of something he has written about and that is that he has to remember that many of his readers are new readers and so he has to keep repeating himself. So, your point is well taken. Investing is about risk. I just saw another thread started about Chinese CDs.

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Re: India Crisis

Postby Ranger » Fri Sep 06, 2013 9:24 am

India's new central bank chief Raghuram Rajan (former IMF economist and author of "Fault Lines") announced new FX swap which might be interesting for NRI.

http://rbi.org.in/scripts/BS_PressRelea ... prid=29480

http://ftalphaville.ft.com/2013/09/05/1 ... an-fx-swap

Investors will be getting LIBOR+400bp for 3 year dollar deposit.

Current LIBOR is at 26 bp, 3 year US note is at 88.7 bp. So spread between US and Indian USD deposit is around 337 bp.

This is above BBB OAS emerging market corporate spread. Atleast this looks interesting.

http://research.stlouisfed.org/fred2/graph/?s[1][id]=BAMLEM2BRRBBBCRPIOAS
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Re: India Crisis

Postby gkaplan » Fri Sep 06, 2013 9:34 am

Morning Edition on NPR did a feature story this morning on this.
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Re: India Crisis

Postby Ranger » Fri Sep 06, 2013 9:39 am

Ok thx. I will try to listen later in the day in their website.
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Re: India Crisis

Postby Ranger » Fri Sep 06, 2013 11:58 am

http://www.npr.org/blogs/parallels/2013 ... decade-low

I did listen to it. It is not about FX swap, but more about bad economy and inflation.

This swap is dollar swap, so wont be effected by inflation or devaluation of currency. There is capital control risk and may be bank going under. As an NRI, it is attractively priced for me.
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