Dollar woes

The dollar has become the most sought after currency post the October carnage we've seen in the equity markets. A slap on the face to those who suddenly felt that the Euro would replace the Dollar as the world's benchmark currency. I always wondered when did the currency that ultimately influences the value of the Euro become it's poor cousin.

The stories about $ weakness came about post lot of news of Crude being traded in Euro by Iran supposedly the 4th largest reserves. And then others that sought to trade only in Euros when as fears of US making a mess of a larger mess.

There is another theory that is doing the rounds in some quarters is the lack of dollar credit domestically and its direct impact on impeding growth. In effect these arguments are put forward by self styled/proclaimed Nobel Laureates.

Yup Ratan Tata has gone on record that raising funds globally has become tough. This is not something specific to the dollar but credit as a whole abroad including India. Also credit growth for October is 29% as reported by TT Ram mohan. And by all published Data credit growth has been increasing and increasing quit sharply.

One always read credit growth figures for last year to be in the range of 22-25%. For the month of October which saw the worst carnage in Indian markets that was attributed to lack of fundamentals, credit crunch etc. how does credit growth remain so high?

I remember KV Kamath in 2006-7 screaming that interest rates must go down as there is no credit off take. Dickhead just tell it bluntly that you wanted the world to borrow more and have a better yield on your advances. There is demand for credit today but you real scared to fund it. And if what are you funding? Credit to buy more dollar to be put abroad?? And are you consicoulsy funding it towards factors the contribute to economic growth?

And then there are those who believe that the reason for the slowdown in the economy is because his Standard Chartered banker/friend told him that there is no "dollar credit". When did HLL or Maruti fund its domestic working capital requirement or expansion plans using dollar credit?

Oh yes the Big infrastructure companies have been raising funds abroad, given the interest rate differential last year. But I thought several restrictions were placed on ECBs as the rupee went into the upward spiral last year. So credit off take at the corporate end was only restricted to funding from abroad in dollars and domestically its was us Indians whose credit requirements funded the real estate boom. So that explains the Credit growth figures Huh???

Suddenly its sounds as if Dollars was the chosen currency for credit off take. What ever happened to the good old rupee...

I obviously ain't denying the impact of dollar shortage and its impact on credit. But to say that dollar credit not being available and therefore projects domestically are not being funded is utter stupidity.

I thought there is a shortage of rupee funding: The logic-- RBI has been buying the rupee aggressively post the FII sell off to support the rupee from depreciating further. Therefore the central banker has been absorbing huge amounts of rupees from the system as hedge funds and Hot money flew away. So rupee has suddenly become tight which obviously then impacts credit off take domestically.

The other obvious indirect impact was the Dollar shortage globally. Again not the need for dollar credit but just the asset(if one could still call it). The problem was two fold. One where domestic banks had to buy dollars from the central banks to replenish the shortage and their working capital/reserve requirements abroad. Second is where Corporates that could not meet working capital requirements and various ambitious expansion plans because of the dollar shortage abroad. And there is also enough talk about how various forex products sold again by these "fresher MBA-I know it all types" which probably have fuelled the need for more of the greenback to fund their off balance sheet items.