India Slowdown Pressures Singh to Bolster Lowest BRIC Reserves

India Slowdown Pressures Singh to Bolster Lowest BRIC Reserves

India’s weakest economic growth since 2009 escalates pressure on the government to increase the smallest foreign-exchange reserves among BRIC nations, as policy makers struggle to contain a sliding rupee. The reserves have dropped 13 percent to $278 billion since a peak in 2011 and are equivalent to less than seven months of imports. Bank of America Merrill Lynch estimates India needs as much as 10 months of import cover for currency stability, a figure still about half the average in Brazil, Russia and China.Prime Minister Manmohan Singh’s potential options to shore up confidence in the rupee include issuing India’s first dollar sovereign bonds, a deposit program to tap the country’s diaspora and bilateral currency-swap agreements. Boosting reserves could avoid the need to support the currency with further interest-rate increases that risk damaging efforts to revive investment.

“India needs to explore all possible funding options,” said Sonal Varma, an economist at Nomura Holdings Inc. in Mumbai. Rate increases may deter some capital inflows by worsening India’s slowdown, she said.

The rupee has slumped 17 percent versus the dollar in 2013 as India’s record current-account deficit made it vulnerable to an outflow of capital from emerging markets, spurred by the prospect of reduced U.S. monetary stimulus.

The currency fell 0.5 percent to 66.015 per dollar at the close in Mumbai yesterday. The S&P BSE Sensex index of stocks rose 1.4 percent. The yield on the 7.16 percent government bond due May 2023 slid to 8.46 percent from 8.60 percent on Aug. 30.

Crisis Echo

Rupee weakness has revived memories of India’s 1990s crisis, when the nation needed an International Monetary Fund loan as foreign reserves waned. Singh said last month growth will speed up and India won’t face a repeat of that turmoil.

The shortfall in India’s current account widened to an unprecedented $87.8 billion or 4.8 percent of gross domestic product in the fiscal year ended March. Gold and oil imports contributed to the imbalance in the broadest measure of trade.

India also had $172 billion of debt maturing within 12 months as of March 31, official data show.

If the government “tells us how it will finance or roll over the debt of $172 billion by March,” that might stabilize the rupee, said Manish Sonthalia, a fund manager at Motilal Oswal Asset Management Co. in Mumbai.

The Reserve Bank of India raised two interest rates in July, part of a cash squeeze to boost the currency. Banks from HSBC Holdings Plc to BNP Paribas SA have since cut back growth forecasts. Expansion (INQGGDPY) dipped to 4.4 percent last quarter from a year earlier as investment slid and consumer spending moderated.

Bond Issue

Finance Minister Palaniappan Chidambaram said last month some state financial companies would be allowed to issue “quasi-sovereign” bonds to garner dollars.

The government has also eased foreign investment curbs in industries such as aviation and retailing to woo funds, in a drive since 2012 to spur growth and avert a credit-rating cut.

Bank of America estimates a deposit program for India’s diaspora could raise as much as $20 billion, and sovereign dollar debt about $5 billion a year. Reform steps so far are unlikely to add more than $5 billion to reserves, it said Aug. 29.

Chidambaram predicts a current-account gap of about $70 billion or 3.7 percent of GDP this fiscal year. He expects inflows to finance it and forecasts an accretion in reserves.

The government has raised taxes on inward shipments of gold and plans to compress imports of oil and some non-essential items. The Reserve Bank of India estimates the sustainable deficit level is 2.5 percent of GDP.

India’s reserves were $277.7 billion as of Aug. 23, equivalent to 6.7 months of import cover based on average monthly merchandise inward shipments of $41.4 billion in the year through July, RBI and government data show.

The holdings are adequate near term, Moody’s Investors Service said Aug. 19. China has $3.5 trillion of foreign reserves, Russia about $508 billion and Brazil $373 billion.

The RBI’s currency stabilization measures have raised funding costs and may weigh on Indian growth in coming months, HSBC said yesterday, lowering its forecast to a 4 percent expansion in 2013-2014 from 5.5 percent.

To contact the reporter on this story: Unni Krishnan in New Delhi at ukrishnan2@bloomberg.net