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India Markets Plunge Pressures Singh as Economy Teeters

India Markets Plunge Pressures Singh as Economy Teeters

India’s biggest stock market slide in almost two years, surging bond yields and an unprecedented plunge in the rupee are pressuring officials for fresh steps to stem capital outflows and revive a struggling economy.

The S&P BSE Sensex (SENSEX) Index sank 4 percent on Aug. 16 as the rupee touched an all-time low of 62.005 per dollar and the yield on the government bond due May 2023 rose 39 basis points to 8.88 percent, the highest on a 10-year note since 2011.Foreigners pulled $3 billion from stocks and bonds in July on concern the U.S. Federal Reserve could curb stimulus and thereby undermine Indian steps in the past year to revive investment and woo funding for a record current-account deficit. The rupee’s drop risks faster inflation and triggered central bank interest-rate increases even with growth at a decade low. The rout deepened last week even after the monetary authority announced measures to restrict outflows by local companies and individuals.

“The market is questioning the effectiveness of policy makers’ moves and the options available to them,” said Priyanka Kishore, a strategist at Standard Chartered Plc in London. “Earlier, the government said it had a grand plan. This is what the market expected, but the final measures disappointed.”

The currency has weakened about 26 percent versus the dollar in the past two years. The tumble has brought back memories of the early 1990s crisis, when the government received an International Monetary Fund loan as foreign reserves waned.

India won’t face a repeat of that situation as it has enough reserves for about seven months of imports, compared with 15 days back then, Prime Minister Manmohan Singh said last week.

‘Deep’ Problems

The current-account gap widened to 4.8 percent of gross domestic product in the 12 months ended March. The Reserve Bank of India estimates the sustainable level is 2.5 percent of GDP.

“Slow growth, high inflation, a high fiscal deficit and high current-account deficit all point to the inescapable conclusion that India’s problems are deep and structural,” said Prasanna Ananthasubramanian, an economist at ICICI Securities Primary Dealership Ltd. in Mumbai.

While other developing nations are also striving to staunch outflows, the rupee’s 11.2 percent fall in the past three months is the worst after the 15.3 percent decline in Brazil’s real in a basket of 24 emerging markets tracked by Bloomberg.

The Reserve Bank of India since mid-July has raised the marginal standing facility and bank rates, capped cash injections into the banking system and tightened lenders’ daily reserve requirements to curb the supply of rupees, seeking to shore up the currency’s value.

The government has also raised taxes on gold imports to try and narrow the trade imbalance. It plans to allow some state companies to issue quasi-sovereign bonds to garner inflows to help finance the current-account gap.

Targeting Outflows

The monetary authority targeted outflows on Aug. 14, cutting the amount Indian companies can invest abroad without approval to 100 percent of their net worth from 400 percent, and saying residents can remit $75,000 each financial year compared with a previous limit of $200,000.

Finance Minister Palaniappan Chidambaram said last week curbs on gold and silver imports and plans to compress inward shipments of non-essential items will trim the current-account gap to $70 billion, or 3.7 percent of GDP, this fiscal year.

India will “remain exposed to funding risks” if the current-account deficit exceeds 2.5 percent of GDP and consumer-price inflation stays above 7 percent, according to Chetan Ahya, a Morgan Stanley economist in Hong Kong.

Global funds have cut holdings of rupee debt by about $10 billion since May 22, when U.S. Fed Chairman Ben S. Bernanke said $85 billion a month of debt purchases could be reduced if America’s jobs market shows sustained improvement.

Singh’s Push

Asia’s third-biggest economy may expand 5.5 percent in the year through March 2014, compared with 5 percent in the previous 12-month period, the central bank estimates. That lags behind the 10-year average of about 8 percent as well as the performance of neighbors from Indonesia to the Philippines.

Singh said in a speech on Aug. 15 marking India’s Independence Day that slow growth won’t last long. Work on ports, airports, industrial corridors and rail projects will start in coming months, he said.

The premier is seeking to repair the image of his government and the ruling Congress party before elections due by May. Graft scandals, clashes with coalition partners and the risk of a credit-rating downgrade have hurt his administration.

Stagflation Conditions

The government began reforms in September 2012 to restrain the budget deficit and ease restrictions on foreign investment in industries from aviation to retailing.

Etihad Airways PJSC agreed in April to buy a 24 percent stake in Mumbai-based Jet Airways (India) Ltd. for 20.6 billion rupees ($334 million), taking advantage of the changes. AirAsia Bhd. in March won approval to form a venture with Mumbai-based Tata Group to set up a local low-fare airline.

The latest Indian data show conditions akin to stagflation persist. Industrial production fell 2.2 percent in June from a year earlier. Consumer prices rose 9.64 percent year-on-year in July, the second fastest in the Group of 20 major economies.

The figures underscore India’s need to address structural issues such as “infrastructure bottlenecks, policy uncertainly and governance,” said Rupa Rege Nitsure, an economist at Bank of Baroda (BOB) in Mumbai.

To contact the reporters on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net; Jeanette Rodrigues in Mumbai at jrodrigues26@bloomberg.net

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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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