India’s Quick-Fix Steps Aren’t Helping the Rupee

August 14, 2013, 2:58 AM

India’s Quick-Fix Steps Aren’t Helping the Rupee

By Sudeep Jain and Shefali Anand

India this week announced several steps aimed at shrinking its large current-account gap and stabilizing the rupee, but economists and markets have reacted with a shrug.
The rupee has continued to slide. On Wednesday, it was trading at 61.57 rupees for one U.S. dollar, versus 60.80 for a dollar, before India outlined its plans late Monday. It is not far from a record low of 61.80, reached last week.The measures, outlined by Finance Minister Palaniappan Chidambaram late Monday, are meant to reduce India’s import bill by buying more oil from Iran in rupees rather than from the international market in dollars. On Tuesday, Indiaraised taxes on gold and silver to make these more expensive in the domestic market, in an attempt to reduce imports.

Mr. Chidambaram expects these steps to help cut the country’s current-account gap from a record $87.8 billion or 4.8% of gross domestic product, for the year that ended March 31 to $70 billion, or 3.7% of GDP, for the current fiscal year.

Mr. Chidambaram also announced steps to increase capital inflows to fund this gap. These include raising money via a quasi-sovereign bond issue, allowing Indian companies to raise more debt overseas and making it more attractive for non-resident Indians to park their savings in India.

The finance minister expects these steps to bring in $11 billion in the current fiscal year, which he said will help cover the $70 billion current-account gap.

For one, many are worried India’s slowing economy means regular inflows into Indian stock and bond markets and foreign direct investments will be slower than in pastyears. The economy is set to grow at 5% in 2013, much lower than rates of around 9% a few years ago. Foreign institutional investors, for instance, have pulled out more than $10 billion from Indian stocks and bonds since June.

These outflows were stoked by expectations that the U.S. Federal Reserve will soon start cutting back its $85 billion-a-month bond buying program, which had led to a flood of cash in the global financial system. Now, global investors are being more cautious about where they put their money, and India isn’t very high on their list due to its failure to institute business-friendly overhauls, say economists.

When the global environment was conducive, India was able to fund its record quarterly current-account deficit of 6.7% of GDP for the quarter between October and December 2012. But now “it will become difficult even to fund a lower deficit,” said Sachin Shukla, an economist at Axis Capital in Mumbai. “We’re competing for a shrinking pool of funds, with other emerging markets.”

Economists say that India’s foreign exchange reserves of $280 billion, which cover around six to seven months of imports, are enough to stave off a crisis. But these reserves could deplete quickly if India doesn’t get the dollars it needs to fund its current-account gap.

“I don’t think (a balance-of-payments crisis) is a near-term concern,” said Leif Eskesen, chief economist for India and Southeast Asia at HSBC Global Research in Singapore.

Observers say India needs to attract long-term capital by economic overhauls that would open up more domestic sectors to foreign investors and making it easier to conduct business. Other moves to boost investor confidence have stalled, hurting sentiment. India, for instance, has cleared several infrastructure projects in the last two months, but these projects haven’t yet begun.

“It’s important now to begin the implementation of the reforms that have already been announced,” said Mr. Eskesen.

Structural reforms will take time, so “continued plumbing” – actions like those outlined by Mr. Chidambaram – will be needed in the short term, he added.

These could include other efforts to by India’s government to raise short-term capital. The Reserve Bank of India could also take further measures to reduce the availability of the rupee after it last week took measures to squeeze the availability of funds onshore.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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