Rupee appreciation and its after-effect

The rupee has witnessed around 12% appreciation last year, the most since at least 1974. On 16’th Jan 2008, it was quoting at 39.068 per US dollars (USD) against 44.28 at the end of 2006. The strong economic fundamental is one of the major factors for attracting Foreign Direct Investment (FDI). The appreciation got further strengthened by the sub-prime crisis in US. The sub-prime crisis in US led to fall in US market and investor started taking their money out. They looked for the best market to invest and found Indian market more attractive. According to Security and Exchange Board of India (SEBI), the net investment in India by FII was 19.53 bn USD in 2007 as compared to 8.87 bn USD in the year 2006, a 120% increase in the FII inflow. As per the data from commerce ministry, Foreign direct investments through august last year totaled $12.9 bn USD as compared to $11.1 bn for the whole of year 2006. This high inflow of money from the international market has increased the demand of rupee significantly and that has propelled the sudden surge in value of rupee against dollars. This could have impact on various aspects including trade, inflation and government policy as well.

International Trade:

The strengthening of rupee has made import attractive while it has severely impacted the export. Export growth slowed down to an average 17% till Oct, 2007 from 21.3% a year earlier. The current account (Account for export and imports) deficit widened in the three months through September to $5.5 bn, while the capital-account (Account for FDIs , FIIs and overseas borrowings) surplus more than doubled in the quarter to $34.75 bn. IT business is one of the worst hit industries with all the companies showing slump in growth. These companies have sought for government interference, which is yet to be addressed.

Petroleum Prices:

The soaring crude oil prices has always been a cause of concern for India oil companies with no say in the domestic pricing of petroleum products. The $100 per barrel crude oil would have left government with no other choice except increasing the oil price, which no government will be willing to do when hardly a year is left for the Lok Sabha election. The appreciation in rupee has helped government to compensate the high oil price to some extent.

Impact on Inflation:

January 2007 witnessed the highest inflation in last 3 years because of increased demand for pulses and general goods with supply constraints. The appreciation in rupee made import cheaper and hence decreased price, which led to decrease in inflation to almost 5 years low in December, 2007.

As the full impact of subprime is yet to be amortized and expected further cut in Federal Reserve interest rate, the rupee is expected to further appreciate to 38 per dollar by the end of this year.

Oil price struggles to touch $100

Oil prices are closing in towards the triple digit figure of $100 per barrel. The $100 is a very strong psychological barrier and the prices may move swiftly in either direction once this level is crossed.

The US light crude hit an all time high of $99.29 per barrel on Tuesday. This was in anticipation of the reduction in inventory level in Wednesday’s announcement. Also, there was fire at two US refineries.

The oil prices have risen by more than 40% this year from $61/barrel. Much of this increase can be attributed to the weakening dollar and concerns for supply of oil. Markets are adjusting for the future risks of US attacking Iran.

High oil prices are having an adverse impact on Asian economies importing oil.

King Abdullah of Saudi Arabia said "Oil is energy for building and prosperity, it shouldn't become a means of conflict". Saudi Arabia is the biggest oil producer in the Organisation of the Petroleum Exporting Countries (OPEC). OPEC has a share of more than 40% in oil exports.

World's top paid executives

The top 10 CEOs in the world ranked on the basis of the compensation package are:

Rank	CEO's Name	Company	$ m	Age
1	Steven P Jobs	Apple	647	52
2	Ray R Irani	Occidental Petroleum	322	72
3	Barry Diller	IAC/InterActiveCorp	295	65
4	William P Foley II	Fidelity National Finl	180	62
5	Terry S Semel	Yahoo	174	64
6	Michael S Dell	Dell	153	42
7	Angelo R Mozilo	Countrywide Financial	142	68
8	Michael S Jeffries	Abercrombie & Fitch	115	62
9	Kenneth D Lewis	Bank of America	100	60
10	Henry C Duques	First Data	98	63

Source: Forbes Magazine

Dollar continues to fall against major currencies

The dollar maintained its fall and reached a record low against Euro amid the speculation that US subprime worries may further force Fed to cut interest rates even more.

Hedge funds are dumping dollars heavily and the fall looks like a long term trend with lots and lots of uncertainties surrounding the short term outlook. So its fair on the Brazilian supermodel Gisele Bündchen's part when she preferred to be paid in Euros. Bündchen joins the millions who have lost faith in dollar. Earlier Warren Buffet had expressed that his faith on dollar is dwindling.

More news article on this:
Gisele Bundchen: 'I won't get out of bed for US dollars'
New low for the dollar as top-paid model demands her fees in euros
Supermodel Bündchen joins hedge funds in dumping dollars

Gold price hit 28 year high

Spot gold today hit a high of $814.10 an ounce and closed above $800 levels. This overtook the previous high price of January 1980. Gold and Oil prices are surging since the sub-prime woes are affecting the stock markets and metals are seen as a safe place for investment. Yesterday Citigroup announced that it could have to write-down about $11 billion due to bad mortgage.
The record high for gold in Nymex is $875 set on January 21, 1980.

Some causes behind the current spike in gold prices are:

• Low interest rate (Fed cut the rates last week to 4.5%)
• Sub-prime crisis creating uncertainty in stock markets
• Dollar is weak against other currencies
• Crude oil is at all time high
• Turkey-Kurdish conflict
• Supply concerns due to union's problem in South Africa after several deaths in mines.

In 1990 gold prices soared because:

• Iranian revolution (1979)
• Russia's intervention in Afghanistan
• Strong oil prices
• High inflation

Though inflation adjusted price of gold is nowhere near the highs reached in 1980s still the trend seems to be intact upwards and may very soon cross the all-time nominal high price.

Crude oil price scales new heights

Crude oil price crossed $93 (€64) a barrel in New York.
In London, Brent Crude hit an all-time high of $90 a barrel.
In October the price has risen by more than 16%.
In the year 2007 it has increased by more than 50%.
The current price of crude oil is an all time high in nominal dollars. However inflation adjustments make it slightly below the peak touched of $101.7 in April 1980 (Iran cut the exports).

The trend for the crude oil price is shown below:


Reasons for sharp rise:

Mexico shut one-fifth of its production due to bad weather in Gulf of Mexico.
OPEC is not increasing production to compensate for the reduced supply.
Peak demand period because of northern hemisphere winter season.
Tensions between Turkey and Iraq over Kurdish militants.
U.S. sanctions over Iran's nuclear program.
Dollar has touched a record low.
Oil futures are being used as hedge against the weakening dollar.