India’s reserves squeezed as investors shun rupee assets
India’s reserves squeezed as investors shun rupee assets
©Bloomberg
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.”
India’s reserves squeezed as investors shun rupee assets
©Bloomberg
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.”
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