Rupee slide puts India in quandary
By Raja Murthy
MUMBAI -
The Indian rupee dived to an historic low of 54.51 to the US dollar on May 16, to continue its unexpected plight as one of Asia's most ailing currencies in recent times - and continuing a double-edged existence as both a symptom of economic troubles and a doctor in disguise.
Numerous factors, from widening fiscal and trade deficits, inflation, investors rejecting governmental policies, as well as the euro debt crisis in Greece are being attributed to the increasing demand for the dollar at the expense of the rupee.
While Finance Minister Pranab Mukherjee assured parliament on May 16 that the "complex" situation in Europe had affected Asian markets and the Indian rupee, his somewhat strange policies have also contributed to more funds leaving India than entering it.
The controversial general anti-avoidance rule (GAAR), for instance, shocked multinationals in India with its aim to retrospectively tax companies on earlier investments. Britain's Vodafone was asked for taxes for its purchase of the Hong Kong-based Hutchison's cell phone business in India in 2007.
Mukherjee has suspended GAAR for a year, but the backtracking has done little to boost investor confidence in the government. The currency of one of the world's fastest growing economies is expected to sink to 56 to the dollar later this year.
Significantly, Prime Minister Manmohan Singh's government has not yet pressed the panic button, and has not talked crisis management. Manmohan and Mukherjee seem to share an emerging feeling that the rupee's dive could be a blessing in disguise: a humbler rupee, for instance, would compel India to be a more self-dependant and export-oriented economy.
"High inflation in the last two years has eaten the competitiveness of the Indian exports industry at a time when the global economy is already experiencing lower demand," said D K Aggarwal, chairman and managing director of leading New Delhi-based brokerage firm SMC Investments and Advisors Ltd. "This has resulted in a huge rise in the trade deficit, more so with a growth in imports due to rising consumption".
A depreciated currency would increase the competitiveness of industry and help bridge the trade deficit gap, Aggarwal said in an email to Asia Times Online, although adding that "now we believe even the government seems to be worried about the falling rupee".
More immediate fallout could be bad news for those Indian companies heavily linked to the US dollar. The rapidly depreciating rupee could be a "death blow" to those that have borrowed heavily from overseas sources, said Jagannadham Thunuguntla, strategist and head of research at SMC. The rupee has depreciating by 22% since January 2011, from 44.67 to the dollar.
"During the calendar year 2011, Indian corporates raised about $30 billion through External Commercial Borrowing (ECB)," said Thunuguntla in his assessment of the rupee's decline. "The 22% rupee depreciation translates into an increased burden on the Indian companies in repaying the ECBs. Such additional burden works out to US$6.6 billion."
While it takes much courage to sit still when the currency seems to be in free fall, circumstances may quickly limit the choices available to the government to intervene. The Reserve Bank of India (RBI), the usual knight in armor to defend the rupee, is fast losing its shine from overwork at this particular rescue act.
RBI intervention this week helped the rupee claw back temporarily after sinking to the "psychological low" of 54 to the dollar, a situation it experienced last December. But the central bank has acknowledged it cannot continually dip into fast-depleting foreign exchange reserves to steady the currency.
The latest RBI intervention came through selling about $300 million through state-owned banks to cool dollar purchase prices. The banking regulator has already pitched about $20 billion into the market since September 2011 to bolster a currency that has been in the wrong side of 50 since November 2011.
Depleting forex reserves reduce the chances of substantial future RBI intervention, in a realization that administering pain killers cannot cure longtime ailments. India's forex reserves dipped to $293.17 billion, as of May 4, 2012, from $309.5 billion a year earlier, and resulted in questions over what best to do with surplus reserves being dropped in favor of concern there will be barely enough dollars to fund imports for a year.
The RBI is resorting to other measures - some say overdue - such as issuing a circular on May 10 asking exporters to immediately convert a minimum of 50% of their dollar holdings into rupees. Exporters were earlier allowed to have 100% of their income in dollars in their Exchange Earner's Foreign Currency Account (EEPC).
"The facility of EEFC scheme is intended to enable exchange earners to save on conversion/transaction costs while undertaking forex transactions in future," RBI chief general manager Rashmi Fauzdar said in the circular. "This facility is not intended to enable exchange earners to maintain assets in foreign currency, as India is still not fully convertible on [the] Capital Account." The measure was essentially to reduce pressure on the rupee.
Yet the downward journey of the rupee has continued this week. It could deepen the somber mood over the regional impact of a weakening global economy and jitters over the Greek government debt crisis and the fate of the euro.
While the fundamentals of India's economy remain strong, and the wise continue being confident of long-term potential, India is no longer seen as one of the emerging economic markets reasonably protected from global storms. The country's economic growth has slowed by nearly three percentage points in the past four years, from a high of 10%.
Soaring imports of oil and gold also feature on the list of villains blamed for the rush for dollars and a weakening rupee. India has an average daily bill of $500 million for oil imports, and an increasing purchase of dollars to pay for oil weakens the rupee, and a weaker rupee results in a higher oil import bill. The higher oil bill is already playing havoc with politically sensitive domestic fuel prices, with uproar each time they are increased. Another rise in fuel prices appears imminent.
Higher oil costs are in turn driving up consumer prices and slowing manufacturing and industrial growth. The RBI confirmed the bad news in its monthly bulletin for May on the October-December quarter of the financial year that ended on March 31.
The latest RBI overview of the economy reported that the balance of payments was coming " under stress", with a widening trade deficit during the last three months of 201. Investment has dipped, and foreign exchange reserves went down by $12.8 billion in October-December, compared with an increase of $4 billion during the same period the previous year.
Yet rather than seeing a decline in the rupee as a blow to "Brand India", a pragmatic view sees the fall as a reality check. "The Indian economy will learn to adjust to a new [low] level of the rupee, although the adjustment will be painful for some and positive for others," said investment consultant Arjun Parthasarathy.
Parthasarathy remembers that India's rise in as information technology outsourcing hub a decade ago was due to a weak rupee. "Even after the rupee gained strength, India's IT sector only marched forward, not backwards, as seen by the CAGR (compounded annual growth rate) growth of over 20% in revenues over the last 12 years," said Parthasarathy, currently investing his two decades of experience as an investment banker in running an investor guidance website.
Aggarwal of SMC, who expects the rupee to trade between 51 and 55 to the dollar for some time, argues that "Weakness and volatility in currency always act negatively in the investment decision of any foreign investor. But given the larger context, the current rupee slide might well serve as an economic partition of India, with those with less faith leaving the country to leave the rest to prosper in peace."
Comparisons are emerging also to around 1991, when similar resource and economic challenges led to the reforms led by then finance minister Manmohan Singh, and the celebrated opening up of India's economy, to be followed by a decade of increasing foreign investment, growth and prosperity. "This is an era of reduced earnings and increased 'learnings' for all market participants," said Thunuguntla
If life is about learning how to turn troubles into triumphs, lessons learnt from the rupee dive could usher in the next generation of more concrete reforms - and an economy growing on sound industrial quality than merely being a hub for cheaply available labor and skills.
Asia Times Online :: Rupee slide puts India in quandary
Come on down not so incredible nor shining
