India: A Rupee Devaluation On The Cards

The Indian economy has low global linkages, with largely intrinsic growth. However, the markets are linked: 51% of Nifty revenues are not in INR, and of the rest banks still have risky metal exposure. As flows reverse, the seller could be price insensitive, and stocks with highest rise in FII ownership of late could have an overhang. 

Commodity prices changing trade and capital flows. Commodity prices are back to 2004 levels, due to both demand (China weakening earlier than expected), and improving supply. Oil, gas, iron ore, coal, and steel are among the worst affected. This is dramatically changing global trade (and thus capital) flows. 

Current account surpluses are shifting from oil exporters to the likes of China, Japan and Germany. Current account deficits shrinking in India and the UK but expanding in exporters like Brazil and South Africa. 

■ Affects capital flows and global growth. Earlier oil producers exported capital through SWFs. But their combined current account at current oil price swings by US$0.5 tn to a deficit of US$100 bn: flows from them may be reversing, not just slowing (likely explaining the redemption-type selling seen lately). Beneficiaries of lower oil prices do not have mechanisms yet to deploy their surpluses. Thus, demand in stressed economies must adjust through currencies (the canaries this crisis), which must fall to hurt domestic demand. Global nominal USD GDP growth could be weakest since 2001. 

■ Avoid global exposure; high FII ownership an overhang. The Indian economy has low global linkages, with largely intrinsic growth. However, the markets are linked: 51% of Nifty revenues are not in INR, and of the rest banks still have risky metal exposure. As flows reverse, the seller could be price insensitive, and stocks with highest rise in FII ownership of late could have an overhang. We also avoid stocks exposed to global growth (e.g. commodities). We believe demand for Indian IT and healthcare may not be as badly impacted. We stay constructive on domestic-focused plays.