Performance of the US dollar and outlook on Indian Commodities and equities

Ashith Kampani, an Independent Financial Advisor & Entrepreneur, with capital market experience of more than 30 years. Currently Chairman of CosmicMandala15 Financial Advisors LLP, chairing two committees of Bombay Chamber – India’s premier chamber of commerce and industry. Ashith has rich experience in private capital markets, where he advised issuers and capital providers in connection to private debt or equity investments and all aspects relating to such transactions.

Ezilarsan PKP: Can you share your opinion & views on the US dollar.

Ashith Kampani: Four pillars of any economy are Currency, Interest rate, Inflation & commodities. If you are net importer then the foreign exchange reserves and current account and trade account are always under pressure, if the currency depreciates then importing nation also imports inflation, but if the currency is globally accepted for trading and settlement then the pressures are limited.

US Dollar currently enjoys the status of most common, easily acceptable as well as globally most traded and settlement currency. All the major commodities are benchmarked to the movement of USD, since 2007-7 financial crisis commodities like Crude Oil, Gold Copper, Iron Ore and Coal etc. have been fluctuating on two major counts: one in the demand-supply balance and the other fluctuation in value of USD. The spike in Crude oil and Gold, post 2007-8 financial crisis is one example where USD turned weak and price of commodities rose.

On the other hand the value of USD has been fluctuating since 2007-8 financial crises, key reason initially is the fall in the interest rates was hurting the treasury and debt investors and outflow from US created fluctuation in the value of USD. Till 2014 June US was net importer of Crude Oil but as Shale production picked up in US the domestic OIL production began to flow in the system and US was importing less and by December 2014 it became net exporter. This created a glut of supply in the international market and value of Oil declined, along with the fear of Fed increasing the rate started to attract inflows to treasury and debt and equity were facing outflows.

While Oil price were fluctuating between $45-60 WTI, US domestic economy started to show signs of recovery with Jobless rate falling all time low, many business big and small began to witness better outlook on revival of domestic demand. These signals were powerful and inflow in US started with USD appreciating which is a double whammy for commodities.

In my view US Fed has managed to revive the economy well till now, it will now depend on how rate rise would impact the domestic economy in US along with the revival of inflation. US Dollar today is the most powerful currency and it will remain the most powerful for next few decades.

Ezilarsan PKP: In India’s context do you see commodities would outperform equities.

Ashith Kampani: Since 2010 India has been having its challenges on the commodities front. Iron Ore mining ban, Coal Mining license related legal issues hampering the process. Crude price since then till mid-2014 rising have been affecting India’s Current Account CAD, Trade Account TAD and Fiscal Account FAD. Import of Gold adds more worries.

Weak INR was leading to import of inflation; high-interest rates were affecting the local companies balance sheets and home loan borrowers, which led to rising commodities during the period of 2010-2014, hurting India’s Fiscal. In last couple of years many commodities have come down due to negative growth in most of the developed economies, and for next 12-18 months it does appear that many economies will be booming, barring select economies like US, India and it is possible for China to continue with positive growth.

Coming to India, Interest rates may come down, local production of Iron and Coal production can bring down the import bill, Gold monetization (if it succeeds) may keep gold price under check, Agri commodities may fluctuate as per demand supply and monsoon. However, India is large consumption economy, hence any pick up in the economy will generate demand for commodities so it may keep the price stable but equities can perform better as it is widely accepted instrument and many FPI may look to invest besides Indian investors.

The valuation in Technology and start-ups has potential to show bigger appreciation versus other equities and commodities in mid to long run.