Indian Rupee is now 65 against dollar. This is a sharp fall from the 54 levels in late April 2013. This paper examines the following:
1. Reasons
2. Possibility of 1997 Asian or 1998 Russian crisis
3. Unofficial Indian Funds Abroad' - A potential game changer
4. Beneficiaries of the current fall in rupee
5. Future Outlook
1. Reasons
During 2005/6 period, the Indian Rupee (INR) had touched 40 levels which triggered a panic among exporters. It is stated that this was due to the weak dollar. During those days there were talks in GCC to remove USD peg. Thereafter the QE also increased the supply of the USD in the market. Thus abundant USD had made USD cheaper against INR. Moreover there were heavy demand for INR due to portfolio investments. Now the INR is under pressure due to lower Indian growth rate, which doesn't attract portfolio investments. On the other hand the portfolio investments seem to exit India. There are of course other factors such as tapering of QE by US Fed Reserve.
2. Remote Possibility of 1997 East Asian or 1998 Russian crisis
- Short term currency exposure was high in both Asian and Russian crisis. The sudden exits created panic in the market. However even after settling the short term currency exposures there is sufficient cushion in the current Indian situation.
- East Asians also had high current account deficits and too much overseas debt. Quite a lot of overseas liabilities were of private businesses. In India, overseas corporate debt is relatively less and it amounts to only 29 per cent of all overseas obligations. Moreover vast majority of Indian corporates never tried overseas market due to strict criteria such as External Rating requirements, etc.
- Short-term overseas debt was also very high in East Asia. World Bank data says short-term foreign debt respective to official foreign exchange reserves was high at 204 per cent in June 1997 for Korea, Indonesia (170 per cent) and Thailand (145 per cent). As on today official Indian reserves are $ 280 billion and the short term debt is just a fraction of this amount!!
- Private sector debt was too high for the Asian tigers. But Forex Debt to Exports ratio is much favourable in India
3. Unofficial Indian Funds Abroad' - A potential game changer
It is an open secret that rich Indians and some of the leading politicians hold billions of dollars outside India. It defeats all logic for stacking up billions in Swiss & other European banks yielding low returns, this will have a positive impact on Indian currency situation. This category of unofficial funds range from $500m to $1.4 trillion.
Some of these funds will flow into the country at these levels . Another possibility is that Indian Govt will start initatives to attract some of these funds into India - this will be a game changer
This is over and above the normal NRI flows that have already gone up – if the NRIs including those who stacked millions abroad in Swiss Banks channel some funds into India, the crisis is over.
4. Beneficiaries of the current fall in rupee
Whilst NRIs, Software Industry & ancillary services, food, spice & related exporters, Pharma, etc will benefit, there is a different class of businesses who invested abroad since 2007 will also benefit.
Several leading Indian business groups - big and small - had invested abroad. The investments span across the globe including UAE, Qatar, Kuwait, UK, USA, Australia, Brazil and so on. These foreign assets are now having sharp value appreciation. A sample is given in the following table.
5. Future Outlook
Unreliable finance media in India
First of the financial media is unreliable - better to ignore most of their utterances. I have been watching what the financial media was saying ever since 5% growth was announced in Feb 2013. It was repeated in May 2013. The media said that Indian growth is much better than ‘mature economies’ and that Indian stock / business valuations were the cheapest in the ‘emerging markets’. No sign of any panic – but since late June the mood changed suddenly with all kinds of negatives filling the media and with the foreign funds withdrawing to the better growth prospects “mature economies – read US and Europe’ India looks doomed.
This again reflects the fact that what financial media harps may be misleading. The real reactions of the investors are short term. 80:20 principle is applicable. 80% of the market moves are based on the reactions of the 20% of the investors. Such investors include grand daddies in the game such as Goldman Sachs and JPM.
Beyond Headlines
- Earlier this year Goldman sachs said Nifty to touch 6600 by year end;
- JPM stated in August that Indian banks are now good buys
- GS Singapore subsidiary buying into the Yes Bank. - it is a positive vote for Indian banking system. http://www.moneycontrol.com/news/buzzing-stocks/goldman-sachs-singapore-buys-1862-lakh-sharesyes-bank_939300.html
Foreign Exchange Reserves
Changes in FX reserves is critical Latest data as on 23 Aug shows a comfortable position as follows:
2. Foreign Exchange Reserves
| ||||||||
Item
|
As on August 16, 2013
|
Variation over
| ||||||
Week
|
End-March 2013
|
Year
| ||||||
` Bn.
|
US$ Mn.
|
` Bn.
|
US$ Mn.
|
` Bn.
|
US$ Mn.
|
` Bn.
|
US$ Mn.
| |
1
|
2
|
3
|
4
|
5
|
6
|
7
|
8
| |
1 Total Reserves
|
17,221.1
|
278,807.5
|
194.4
|
205.8
|
1,336.9
|
-13,238.7
|
1,125.5
|
-10,111.9
|
1.1 Foreign Currency Assets
|
15,551.4
|
251,561.1
|
190.2
|
211.7
|
1,425.1
|
-8,164.8
|
1,255.6
|
-5,095.7
|
1.2 Gold
|
1,267.9
|
20,747.0
|
-
|
-
|
-129.5
|
-4,945.0
|
-167.2
|
-4,967.7
|
1.3 SDRs
|
271.7
|
4,394.3
|
2.9
|
-3.9
|
36.3
|
66.7
|
29.0
|
37.7
|
1.4 Reserve Position in the IMF
|
130.1
|
2,105.1
|
1.3
|
-2.0
|
5.0
|
-195.6
|
8.1
|
-86.2
|
2. Foreign Exchange Reserves
| ||||||||
Item
|
As on March 29, 2013
|
Variation over
| ||||||
Week
|
End-March 2012
|
Year
| ||||||
` Bn.
|
US$Mn.
|
` Bn.
|
US$Mn.
|
` Bn.
|
US$Mn.
|
` Bn.
|
US$Mn.
| |
1
|
2
|
3
|
4
|
5
|
6
|
7
|
8
| |
1 Total Reserves
|
15,900.6
|
292,646.5
|
-24.7
|
-720.3
|
839.3
|
-1,751.0
|
839.3
|
-1,751.0
|
1.1 Foreign Currency Assets
|
14,126.3
|
259,725.9
|
-23.4
|
-689.4
|
821.2
|
-342.8
|
821.2
|
-342.8
|
1.2 Gold
|
1,413.8
|
26,292.3
|
-
|
-
|
31.3
|
-730.8
|
31.3
|
-730.8
|
1.3 SDRs
|
235.4
|
4,327.6
|
-0.5
|
-14.3
|
6.8
|
-141.7
|
6.8
|
-141.7
|
1.4 Reserve Position in the IMF
|
125.1
|
2,300.7
|
-0.8
|
-16.6
|
-20.0
|
-535.7
|
-20.0
|
-535.7
|
SEBI data for July 2013 shows that about USD 4 billion has been shifted out of FII during July 2013. http://www.sebi.gov.in/cms/sebi_data/commondocs/FIIInvestmentSector_h.html
It is evident that although there is some outflow of the foreign currency reserves, there are adequate balances to meet the demand of the short term funding i.e short term portfolio funds. If we consider the fact that about 20% -35% of this is owned by Indians abroad or by rich Indians or politicians through their be-namis, then the real impact going forward is quite comfortable.
Blame Subba Rao
Once again it is again proven that monetary policy is too important to be left to the whims and fancies of Governors. Whilst 'star' performer Alan Greenspan created all sort of troubles with his monetary policies, Subbarao was adamant to decrease 'Indian growth rate' to tame inflation. Hence he increased interest rates since 2011 which of course killed Indian growth and the FII interest in Indian market. Subbarao almost killed the golden goose. When he started hiking interest rates, INR was 46.90 against the dollar. Now it is 68.80 - a whopping depreciation of nearly 50%. One of the central bank duties is to ensure currency stability. Subba Rao has failed miserably in this. Of course this currency instability confuses the business community in the country - it is tough to plan ahead and engage in business transactions abroad.
Whilst Govt. of India has also contributed to the situation through its inaction and failure to control corruption and useless environmental laws, Subba Rao's RBI has also played a significant role through its poor monetary policies.
The good news is that he is moving out. The new comer is more savvy and with stronger connections abroad. Unlike Subba Rao who took pleasure in taking opposite stance to finance ministry of India, there is every possibility of better co-ordination under the new Governor.
Overall, there is no need to be panicky and this is the time to enter into some long term buys in Indian stock market. The consumption story in India continues to be strong. Investments in infra is picking up and this will lead to stronger story of investments in India from late this year.
