India’s reserves squeezed as investors shun rupee assets

August 27, 2013 7:18 am

India’s reserves squeezed as investors shun rupee assets

By Victor Mallet in New Delhi and Avantika Chilkoti in Mumbai

India’s foreign exchange reserves have dropped by nearly $14bn since the end of March and are set to dwindle further as international investors shun the rupee and other emerging market assets in favour of the US dollar, according to economists and market analysts. India entered the latest emerging market sell-off, which was prompted by fears that the US Federal Reserve would soon “taper” its quantitative easing, in relatively good shape in terms of financial safety.After years of high economic growth and reserve accumulation, Indian reserves of $278.8bn as at August 16 cover more than seven months of imports, compared with three weeks when India was forced into the arms of the International Monetary Fund in 1991.

While India lost more than 5 per cent of its reserves in May, June and July, Indonesian and Turkish reserves dropped about 13 per cent. India’s total foreign debt is now just 21 per cent of gross domestic product.

But India’s large current account deficit, and substantial debt repayments due in the coming months, will probably further reduce its foreign reserves even if the Reserve Bank of India (RBI) does not spend billions of dollars trying to prop up the rupee, which hit successive records lows last week before staging a slight recovery.

The rupee fell on Tuesday morning, again breaching the level of Rs65 to the dollar and approaching the record low hit last week.

Furthermore, more than $172bn of India’s external debt, 44 per cent of the total, matures in the present fiscal year to March 2014. Even allowing for rollovers of trade finance and other credits, repayments will dent the country’s reserves in the absence of substantial capital inflows that seem unlikely to materialise.

“A lot of that is corporate debt expected to be rolled over but even then it is not a comfortable position to be in,” says Bhupali Gursale, an economist at Mumbai-based Angel Broking.

Andrew Colquhoun, head of Asia-Pacific sovereigns for Fitch Ratings, says countries such as India are now “self-insured” for a crisis, having built up their reserves. That should leave India with more than $230bn at the end of the fiscal year in March 2014 unless there is a further surge of capital flight, he says.

“The reserves are well over 100 per cent of what’s due over the next year,” says Atsi Sheth, senior analyst at Moody’s, the rating agency. “Many countries don’t have that kind of coverage.”

Palaniappan Chidambaram, finance minister, has sought to reassure investors not only that India will cut the current account deficit, from $88bn or 4.8 per cent of GDP in the last fiscal year to $70bn this year, but will also be able to finance the gap with the help of billions of dollars of foreign currency debt issues from state oil companies and financial groups.

If the concerns were purely domestically driven, [Indian currency] intervention would have played a role

– Shubhada Rao, chief economist, Yes Bank

For India’s slowly dwindling foreign reserves and for the rupee, much now depends on the mood of international investors if the US “taper” begins in earnest – and on the willingness of the RBI to defend the currency.

Shubhada Rao, chief economist at Yes Bank in Mumbai, estimates the RBI has put as much as $9bn into direct intervention since the end of May, although the RBI insists that it aims to curb volatility rather than maintain a targeted range for the rupee-dollar rate.

“The import cover ratio is at seven months and I don’t think the government will want to run that down too much,” says Ms Gursale. “So, I don’t think they would intervene too substantially.”

Ms Rao said any success the RBI has in cooling markets would unravel immediately if the threat of capital outflows resurfaced in September, when the US Federal Reserve is expected to make another decision on the “taper”.

“If the concerns were purely domestically driven, [Indian currency] intervention would have played a role,” she says. “But if a large part of the risk is global risk aversion, there is some unsustainability in RBI intervention.

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 (, 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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