India Fighting Worst Crisis Since ’91 Seeks to Buoy Rupee
India increased efforts to stem the
rupee’s plunge and stop capital outflows that are pushing the
economy toward its biggest crisis in more than two decades.
The Reserve Bank of India, whose Governor Duvvuri Subbarao
steps down next month, cut the amount local companies can invest
overseas without seeking approval to 100 percent of their net
worth, from 400 percent, according to a statement late
yesterday. Residents can remit $75,000 a year versus the
previous $200,000 limit. Rupee forwards rose for the first time
this week.
The rupee’s decline is a reminder
of the crisis in the 1990s when the widening deficits in the budget and
current account pushed the currency down 37 percent between 1991 and
1992. Photographer: Dhiraj Singh/Bloomberg
Aug. 7 (Bloomberg) --
Claudio Piron, Singapore-based head of emerging Asia foreign-exchange
and fixed-income strategy at Bank of America Merrill Lynch, talks about
the appointment of Raghuram Rajan as new governor of the Reserve Bank of
India, and the outlook for the Indian rupee and the Indonesian rupiah.
He speaks with Rishaad Salamat on Bloomberg Television's "On the
Move." (Source: Bloomberg)
A man carries sets of computer
speakers in Nehru Place IT Market in downtown New Delhi. Policy makers’
moves since July to tighten cash supply, restrict currency derivatives
and curb gold imports have failed to arrest the rupee’s slump to record
lows as they struggle to attract capital to fund a record current
account deficit. Photographer: Graham Crouch/Bloomberg
Vendors sit beside bags of tamarind on display at a wholesale market in Mumbai. Photographer: Dhiraj Singh/Bloomberg
Policy makers’ moves since July to tighten cash supply,
restrict currency derivatives and curb gold imports have failed
to arrest the rupee’s slump to record lows as they struggle to
attract capital to fund a record current account deficit. The
rupee has weakened 28 percent in the past two years, the biggest
tumble since the government pledged gold reserves in exchange
for loans from the International Monetary Fund in 1991.
“I don’t think this fixes India’s problem, at best it
restricts about $5 billion of flows annually, which doesn’t make
a dent,” Bhanu Baweja, the global head of emerging market cross
asset strategy at UBS AG, said in a phone interview from London
yesterday. “The minute you restrict outflows, people will start
legitimately speaking in terms of capital controls, although
these are only on locals and not on foreign investors.”
Cash Reserves
Central bankers also exempted lenders from cash reserve
rules for certain foreign-currency deposits yesterday. Banks
accepting non-rupee deposits after Aug. 24 from Indians living
abroad need no longer keep 4 percent in cash and invest 23
percent in government-approved securities, the RBI said.
Nomura Holdings Inc. estimated that private remittances and
outward direct investment abroad totaled $15.9 billion in the
year ended March 31, citing central bank data.
“Indian companies’ outward foreign direct investment has
been growing in recent years for various reasons such as
pursuing growth markets, technology, natural resources, and
these could be adversely hit,” Sonal Varma, an economist at
Nomura in Mumbai, wrote in a report yesterday. “While the
authorities aim to reduce foreign-exchange volatility, we fear
that they may end up sending a panic signal.”
One-month offshore non-deliverable rupee forwards, which
investors use to hedge or speculate on the currency, rose 0.2
percent 61.83 per dollar today. NDFs touched a record low of
62.53 on Aug. 6. The contracts, settled in dollars, are
agreements to buy or sell assets at a set price and date.
Rupee Falls
In the spot market, the rupee fell 0.4 percent to 61.4437
per dollar before the announcement. It has lost 11 percent this
year, the second most among 12 Asian currencies. The rupee
touched an all-time low of 61.8050 on Aug. 6. Financial markets
in India are closed today for the Independence Day holiday.
The Bank of New York Mellon India ADR Index for Indian
stocks traded overseas rose 0.2 percent yesterday to 1011.77,
paring its decline this year to 3.3 percent. India’s benchmark
Sensex index is down 0.3 percent this year. SGX CNX Nifty Index
futures for August delivery fell 0.1 percent to 5,746 at 9:48
a.m. in Singapore.
The rupee’s plunge accelerated since May as foreign
investors pulled money from Indian bonds and stocks on concern
the U.S. will pare stimulus. International investors cut their
holdings of Indian bonds by $10 billion since a peak in May to
$28 billion, the lowest since January 2012, according to central
bank data.
Steadying the rupee is the top priority for policy, the
monetary authority said on July 29.
Capital Controls
The imposition of capital controls is one facet of the
“impossible trinity trilemma” that Subbarao says the central
bank is facing. The economic theory argues that it isn’t
possible to have free movement of capital, a fixed exchange rate
and an independent monetary policy simultaneously.
To contain the currency decline, the RBI raised two
interest rates July 15 and restricted bank’s access to cash
through its daily repurchase auctions.
India also boosted import duties on gold and silver on Aug.
13 and banned the import of gold in the form of coins and
medallions to reduce the trade deficit. In a briefing in New
Delhi yesterday, Economic Affairs Secretary Arvind Mayaram said
imported gold must be stored in government-mandated warehouses.
So far, the efforts have fallen short as capital outflows
make it more difficult for India to bridge the gap in the
current account, the broadest measure of trade.
The deficit widened to an unprecedented 4.8 percent of
gross domestic product in the year ended March 31. The
government aims to narrow the gap to 3.7 percent of GDP, or $70
billion, this year, Indian Finance Minister Palaniappan Chidambaram told parliament in New Delhi yesterday.
New Banker
Raghuram Rajan, the University of Chicago economist
credited with predicting the 2008 financial crisis, will take
charge of the Reserve Bank next month after Subbarao’s term ends
Sept. 4. There’s no “magic wand” to fix India’s problems, he
said on the day of his appointment Aug. 6., while adding the RBI
and the government will deal with the challenges.
The measures “are unlikely to have a meaningful impact on
the currency,” Aneesh Srivastava, chief investment officer at
IDBI Federal Life Insurance, said in a phone interview. “For a
long-term impact we need to increase the attractiveness of India
as an investment destination.”
1990s Crisis
The rupee’s decline is a reminder of the crisis in the
1990s when the widening deficits in the budget and current
account pushed the currency down 37 percent between 1991 and
1992. The government secured an emergency loan of $2.2 billion
the IMF by pledging 67 tons of India’s gold reserves as
collateral. Growth slowed to 2.1 percent in 1991, from 5.6
percent the previous year.
Assistance from the IMF led then finance minister and now
prime minister, Manmohan Singh, to open India’s economy to
foreign investment. Since then, economic growth has accelerated,
with GDP expanding more than 9 percent in each of the three
years through March 2008 compared with 3.7 percent between 1950
to 1973.
The country is in a better position to counter a crisis,
with $277 billion foreign reserves, enough to cover more than
six months of imports, according to data compiled by Bloomberg.
That compares with less than two months of import coverage in
1991, according to a RBI report in August 2012.
Growth Slowdown
At the same time, the economy is posting its slowest growth
since 2003, expanding 5 percent in the year ended March 2013.
Last month, the RBI cut its growth forecast for the year through
March 2014 to 5.5 percent form 5.7 percent.
India’s currency defense will raise borrowing costs for the
government and companies, slowing economic growth further,
according to Michael Shaoul, chairman of New York-based
Marketfield Asset Management LLC.
“It is historically very difficult to defend a currency
when you have large current account deficit,” Shaoul, who helps
manage $13 billion in assets, said in a phone interview from New
York yesterday. “These measures are not really helpful as they
are going to do damages to the local economy. The real danger is
that foreigners start to withdraw more capital and you start a
vicious cycle.”