I have a long-term bullish outlook on India as part of a diversified portfolio, but there is one main thing holding me back from being quite as bullish as I am on, say, Russia.
And that is India’s heavy reliance on oil imports, which damages its current account and continually weakens its currency.
Over the past ten years, the rupee has deteriorated from a 1-to-45 ratio to a 1-to-70 ratio vs the U.S. dollar. This is in part from the dollar strengthening, but also from the rupee weakening. So, any gains that investors made in rupee terms were discounted by over a third in dollar terms.
Chart Source: XE
Earlier this year, I wrote an article here called India’s Achilles’ Heel where I discussed India’s dilemma.
In short, many investors underestimate how inversely leveraged India is to energy prices. Many countries rely on oil imports, but because India is still a low income country per capita and is growing rapidly with a massive population, their oil imports relative to their wealth level are very high.
To quantify it, we can use China as a comparison. Everyone knows China is dependent on commodity imports including oil. However, India imports 60% as much oil as China, but its nominal GDP is only 20% as big as China’s nominal GDP. The amount of oil India needs to import relative to its GDP is staggering. Energy security is a challenging enough problem for China, and yet is even bigger for India.
Look how the price of oil over time impacts India’s current account balance, with some recent inflection points marked with green and red dots:
Source: Trading Economics
This is why I like owning the Russia/India combo trade for the long-term. I’m bullish on both countries in different ways into the 2020's. Russia is extraordinarily cheap and has built up a fortress financial situation, but as an energy exporter, the country benefits from higher energy prices. India is always on the expensive side, but has tremendous growth along with low debt to justify it, with relatively little export exposure to the global economy, and benefits greatly from lower energy prices.
Both countries rank well in my annual international report (with Russia ranking higher overall) and one way to play this trade without worrying about oil as much is to own both. They hedge each other’s weaknesses to a significant degree.
If you want to be long Russia with less oil exposure than the major ETFs such as RSX, then Sberbank is the simplest way to do that. Sberbank is essentially a play on Russian currency strength and mild economic growth with less direct oil exposure.
As reported by Bloomberg two months ago in a recommended article, which may be interesting for people following my overall dollar thesis, India is starting to pay for Russian defense exports in Russian rubles rather than U.S. dollars:
Source: Bloomberg, Bank of Russia
Russia is also doing an increasing percentage of business with Europe and China in terms of euros, with a declining share in dollars.
As that Bloomberg article explains, this trend worldwide is likely to continue because as these various non-dollar payment infrastructures are deployed and start to be used, there’s little reason to stop. However, the article ended by saying that Russia won’t be able to give up using the dollar for oil. This was back in August.
Well, as of last week, Russia’s Rosneft is looking to price all its crude oil exports in euros by default going forward. If they are successful in this as they have been with their other trade deals throughout Eurasia, it would be yet another step towards gradual de-dollarization throughout the continent, and would give countries like India more flexibility for their oil purchases.