And the rupee just keeps sliding | FT Alphaville
Jay Shah
And the rupee just keeps sliding
Posted by David Keohane on Jun 25 14:51.Miss Prism. That would be delightful. Cecily, you will read your Political Economy in my absence. The chapter on the Fall of the Rupee you may omit. It is somewhat too sensational. Even these metallic problems have their melodramatic side…
Apparently the rupee’s plight has gotten bad enough for the Reserve Bank of India and the government to have a chat and attempt again to shore up the embattled currency.
Sadly, the market got a little too excited before the measures were revealed and more than a little disappointed afterwards. Too sensational indeed.
The plan, which authorities must hope will obviate some of the need for spending reserves on defending the rupee in the longer run, is to liberalise capital flows by relaxing the rules around inflows. The actual measures are here while below is a summary from Commerzbank:
1) Increased limit for foreign institutional investors (FII) in government bonds by $5bn to $20bn;
2) Broadened investor base in government bonds to include Sovereign Wealth Funds (SWFs), multilateral agencies, endowment funds, insurance funds, pension funds, and foreign central banks. They would still need to be registered with the Securities and Exchange Board of India (SEBI);
3) External commercial borrowing (ECB) limit for manufacturing and infrastructure companies raised to $10bn for rupee loan repayment;
4) Qualified Foreign Investors (QFI) allowed to invest in local mutual funds that hold at least 25% of their assets in the infrastructure sector; and
5) Lock-in period for foreign investment in some long-term infrastructure bonds reduced to one year from three year.
That should all mean more dollars flowing into India to support the rupee. But the rupee, which had rallied in advance of the announcement, wasn’t overly impressed and stayed at record lows of Rs57 against the US dollar. It has fallen over 17 per cent against the dollar since the start of February:
While 12 month non-deliverable forwards moved up slightly to Rs60.51, implying a belief the rupee will continue to depreciate. As Benoit Anne at SocGen said:
India’s big plan to rescue the INR was a big flop earlier today it seems. I guess, expectations were perhaps not managed well and now the INR is back to depreciation mode.
M. Natarajan at Bank of Nova Scotia told the Economic Times that the steps will not have a ‘material’ bearing on the Indian currency:
The market was expecting a slew of measures. The measures announced now won’t have any direct material bearing on the rupee. Unless the RBI comes in with more measures, the rupee will fall back to the 57-58 to a dollar levels.
And Anne argued that although this is a step in the right direction in principle, it does little to boost investor confidence at this point:
The major issues in India are the question marks about growth in the context of China being heavily scrutinized on the same topic, as well as the credibility of economic and financial policies. Allowing investors to buy a bit more local bonds is not a guarantee that foreign investors will rush in, especially if the fundamental problems have not been addressed.
While Sonal Varma, a Mumbai-based economist at Nomura Holdings said, according to Bloomberg:
These are just stop-gap arrangements and disappointing after they built up high expectations. The underlying issues of more economic reforms and cutting subsidies are still not being addressed. What has the government done to reduce the fiscal deficit and curb the current-account deficit?
We have written before about the problems facing the rupee. Attention is often focused on India’s multiple deficits, particularly the current account, but analysts argue that what really matters is at what level the deficit can be funded and by what type of inflows.
And with growth slumping, FDI inflows slowing, an increasing reliance on more volatile portfolio flows and the external backdrop very definitely risk adverse, there is little solace on that front.
India’s increased reliance on hot money inflows to finance its balance of payments inevitably leaves the rupee vulnerable to swings in global risk aversion, and its corollary, the demand for dollar liquidity.
So while Citi’s Rohini Malkani argues there is room for rupee to play “catch up” with equity gains and falls in oil prices — India imports 80 per cent of its crude oil, comprising 30 per cent of its import bill so the current falling oil price is definitely a boon — he, and many other analysts, remain aware that the outlook is poor.
(We note that Richard Iley of BNP Paribas has suggested that considering India’s rapid inflation of recent years, the rupee’s drop is better interpreted as correcting previous ‘real’ overvaluation.)
But the rupee’s bleak outlook is not just down to the global risk environment. Not even close. As we have previously argued, many of India’s problems are home-grown. The RBI has seemed torn between promoting growth and taming inflation while the Indian government is locked in what has been kindly called “stasis”. A stasis which is obviously not helping attract stable capital inflows.
As beyondbrics’ Neil Munshi recently wrote:
If the government enacted two or three significant reforms – on foreign direct investment or tax or any other of the dozens it has promised but failed to pass – it would go a long way toward turning not only the negative sentiment surrounding the economy, but the economy itself.
Thus, while Monday’s moves are at least somewhat positive, they clearly didn’t satisfy those looking for signs of that policy stasis really starting to crack.
The good ended happily, and the bad unhappily.
– Miss Prism
Best Regards,
Jay Shah, FRM
Expect the unexpected!!!