At the time of writing this, the rupee is trading at 68.80 per US dollar. Frightfully close to the prediction of breaching the 70 per dollar mark. Fiscal concerns over the Food Security Bill and the Syria issue have brought the currency lower by 10% in the last 10 days. The sword of sovereign downgrade, to junk status, hangs mercilessly over India's economic fortune. Meanwhile, the government is least interested in paying any heed to the warnings of the RBI. The only solace is the fact that several other emerging market currencies have also lost significant value in 2013, albeit much lesser than the rupee.
As such the RBI has been trying every trick in the book to help the rupee stabilize. It has increased short term interest rates. It has come up with measures to curb the import of gold. It has intervened in the forex markets. But none have been very successful. This is because the underlying reasons for the rupee's fall are different. With US announcing a possible taper off of its QE program, most global investors have been pulling their money out of emerging economies and moving it instead to the US dollar. This has led to a fall in nearly all of the emerging market currencies including that of India. However for India the fall has been magnified due to the structural weakness in the economy because of which the deficit situation has been on the edge.
Therefore there is very little that the RBI can do to support the rupee at the moment. This is the time where the government needs to step in with their structural reforms. That would provide some strength to th e economy which in turn would help boost investor confidence. And this would help bring back at least some of the dollars that have fled our shores in recent times and help the rupee.
Already the Indian energy sector is bleeding on account of high oil and gas imports and falls in the rupee. And now, we should brace ourselves for high crude oil prices as well. The threat of a US led military action against Syria and fears of a further spread of crisis to other Middle East nations has been fuelling crude oil price for some time now. As such, the prices have gone up by over 15% in the last quarter on chances of disruption in supply.
This is nothing new for oil. It has witnessed similar moves in prices in the past on account of unrest in Egypt and Libya. However, the development is likely to hurt India like never before. This is because the spike in crude oil price this time comes along with rupee hitting fresh lows. All this means a bloated subsidy bill for India. That too at a time when it cannot afford to get its fiscal health any messier. While the hike in crude prices at this stage may seem like an overreaction since Syria is not a major oil supplier, it exposes India's vulnerability to the developments in the global oil markets and a stark reminder of the need to become self reliant for its energy needs.
Stock markets, gold prices, oil prices and rupee have each competed to grab headlines over the past few days. Therefore while business channels are making the most of the alarming doom predictions, the poor investor does not know where to hide! It is at times like these we find it irresistible to remind ourselves of Buffett's famous quiz in the letter he wrote to shareholders of Berkshire in 1997.
"If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices? These questions, of course, answer themselves.
But answer this. If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period?
Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the "hamburgers" they will soon be buying.
This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices."
Even 16 years after Buffett wrote these lines, there is hardly anything we need to write to explain or put in context. In fact referring to the allegory of Mr Market one can decipher that he is currently at his manic-depressive best. Statistics ranging from stocks to currencies to commodities to economic data support the doom prediction. And for the wise, patient and disciplined investor there cannot be a better time to fetch a mouth watering bargain from Mr Market.
Of course, given the risks, stocks cannot be the only asset class that you should add to from a long term perspective. It is as important to first take care of short term liquidity needs via safe debt instruments. A little bit of gold is necessary to protect yourself against inflation and currency risks. But if you are looking to create wealth, over the long term, from the safest stocks that are rarely available at a discount, now is the time to do so.
So remember that Mr Market is a very accommodating guy who would not mind being ignored. But investors cannot afford to let go of the opportunity to take advantage of his manic-depressive mood! It would be worthwhile to screen some of the best stocks that you would want to add to your long term portfolio. End.
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