Outflows from the debt market, amid worries that the US Fed will taper its $85-billion-per-month bond-buying programme, contributed to the rupee weakness. Photo: Mint
Mumbai: Renewed interest from foreign institutional investors (FIIs), a rebound in exports, and an expected economic recovery at home, combined with improved economic fundamentals in developed markets, are expected to boost the rupee in the New Year after a volatile 2013.
“The FIIs have invested more than Rs.60,000 crore in 2013 in both debt as well as equity, and about one-third of this has come in December. More importantly, after continuous outflows between June and November, FIIs are also buying Indian debt,” Krishnamoorthy said.
The rupee is coming off a year in which it plumbed new depths, sliding 20% from the start of the year to a lifetime low of Rs.68.85 per dollar on 28 August. It has since recovered to around Rs.62 per dollar, but still lost about 11.08% in the year to date. The domestic currency ended at 61.85 on Friday, up 0.52% from its previous close.
Outflows from the debt market, amid worries that the US Federal Reserve (Fed) will taper its $85-billion-per-month bond-buying programme, contributed to the rupee weakness. Between June and November, FIIs pulled out $13 billion from the debt market as concerns over India’s high current account deficit (CAD) and slowing economy also weighed on investor sentiment.
The rupee’s fall continued even after the Reserve Bank of India (RBI) in July restricted banks’ access to easy money in a bid to prevent speculation in the currency market. An improvement in the CAD, led by the government’s measures to curb imports of non-essential items, especially gold, helped the rupee recover.
Inflows returned in December, with FIIs buying $932 million of Indian debt in the month.
Government data released earlier this month showed that the CAD fell to 1.2% of gross domestic product (GDP) in the July-September quarter, the lowest level since the fourth quarter of 2010-11. It was down from 4.9% in the quarter ended June and 5% in the year-ago quarter.
Economic growth also accelerated to 4.8% in the second quarter from 4.4% in the preceding quarter, aided by higher growth in industry and agriculture and a pick-up in exports.
Exports rose 12% to $81.2 billion in the quarter ended September while imports declined 4.8% to $114.5 billion. Gold imports in the quarter were at $3.9 billion, down from $16.4 billion in the first quarter and $11.1 billion in the year-ago period.
The fact that developed economies such as the US, Japan and Europe are doing better augurs well for exports and hence the rupee, said Ananth Narayan, co-head of wholesale banking, South Asia, Standard Chartered Plc.
“In a way, the fact that the US has started to taper its multi-billion dollar bond-buying programme is good news because that means that they are doing well. The challenge for India is to get the large infrastructure projects off the ground before the next general elections,” Narayan said.
India is expected to go to the polls in May and a lot of the recent positive sentiment among investors is linked to expectations that the country will vote for a decisive mandate in favour of a stable government.
Such expectations have risen after the opposition Bharatiya Janata Party (BJP) won the November-December state elections in Rajasthan, Madhya Pradesh and Chhattisgarh, and emerged as the largest single bloc in the Delhi assembly, although it didn’t stake a claim to form the government for lack of a clear majority.
“The best-case scenario for the rupee would be if stuck projects can be put back on track and we have a clear mandate in the elections later,” Narayan said. He estimates that projects worth more than $100 billion are waiting for clearances currently.
To be sure, foreign exchange (forex) dealers are worried about the ability of the Indian government to stick to its fiscal deficit target of 4.8% of GDP this financial year, citing a tendency on the part of politicians to splurge money on populist measures in the run-up to the election.
On 23 December, credit rating agency Crisil Ltd said it expects India’s fiscal deficit to be 5.2% of GDP. It suggested that instead of cutting spending like it planned to do, the government should meet its fiscal deficit target by taking out special dividends from public sector undertakings.
The government is expected to overshoot the fiscal year limit it set for itself, said Arvind Narayanan, an executive director and head of sales, treasury and markets at DBS Bank Ltd.
“The rupee’s resurgence in the last few days is mostly due to one-off measures like attracting new inflows through special schemes or restricting demand from oil companies in the market. Now, when those inflows are no longer there and oil demand is back, the rupee will be under pressure,” Narayanan said.
RBI collected a total of $32 billion from a special concessional swap for foreign currency deposits and an overseas borrowing window for banks.
Under the special swap window, banks got fresh dollar deposits for a minimum tenure of three years, at a fixed rate of 3.5% per annum. Banks themselves could also borrow up to 100% of their Tier I capital or equity and reserves from overseas, to be swapped with RBI at 100 basis points below the rate prevailing in the international market. A basis point is one-hundredth of a percentage point.
Narayan of Standard Chartered said how the rupee moves depends a lot on the election results. “Elections are most crucial and also the fact of how we handle our fiscal deficit,” he said.
Krishnamoorthy from FirstRand said that though the global scenario looks favourable, a faster recovery in the US may also have its pitfalls.
“If the US economy recovers faster than expected and unemployment falls quickly, then the Fed may reduce liquidity at a more aggressive pace. In that scenario, foreign investors will become more risk averse, impacting emerging market currencies,” Krishnamoorthy said.