International Corporate Finance: Value Creation with Currency Derivatives in Global Capital Markets, + Website

CASE STUDY 4.1

When One of the BRIC(K)s Falls: Trials and Tribulations of the Indian Rupee

This case study accompanies Chapter 4 of International Corporate Finance.

The chapter on the Fall of the Rupee you may omit. It is somewhat too sensational.

Miss Prism, in Oscar Wilde's The Importance of Being Earnest, 1895

Narendra Aneja is the chief investment strategist at the Flying Dragon Fund—an India country fund domiciled in Boston—that has close to $1 billion under management in Indian stocks. The first semester of 2012 had been an utter disaster, with the Bombay Stock Exchange down more than 18 percent, further compounded by a steep depreciation of the rupee. Narendra was reviewing the latest balance of payments statistics and short-term projections (see the case exhibits) in preparation for the board quarterly meeting, when he would have to map out the rupee's likely course. Somehow he would have to make amends for failing to anticipate the reversal in the rupee's fortunes, which only a year ago had seemed so much more auspicious.

ECONOMIC GROWTH AND FISCAL DEFICITS

In spite of its economy expanding at the rate of 6 percent in the first two quarters of 2012, India's currency was now down 20 percent on the year, while its budget deficit at 5.9 percent of GDP (March 2011 to March 2012) grossly overshot its target of 4.6 percent. Structural economic reforms are hindered by the government's lack of a reliable parliamentary majority, and it is likely to focus on the more pressing ...