The rupee has staged a strong recovery after hitting the skids over the last few months. The sudden turnaround has caught some by surprise, but it shouldn't have. The rupee crashing below 60 to a dollar was a capitulation trade that was clearly overdone. Given market data and the likely trajectory of the global economy, the Indian currency could actually exceed expectations here on, regardless of the US Federal Reserve's tapering programme.
India is among the five largest economies on the basis of purchasing power parity, and is among the most open with international trade now nearly 50 per cent of GDP. Clearly, it can no longer be insulated from global market and risk developments.
Sure, economic growth hit a record low of 5 per cent in the financial year ended March 2013 and slowed to 4.4 per cent in the first quarter. But apart from China, India still has the highest growth rate among all economies with a GDP of around $2 trillion or more. Yet, it has had the worst-performing currency in its peer group since May, when talk started about the Federal Reserve tapering its bond-buying programme.
It would appear that sentiment got the better of objective analysis. India's net equity inflows amount to $12 billion since the beginning of the calendar year, while there's been a much smaller outflow from debt investors. But we perceive a crisis of confidence among foreign institutional investors (FIIs).
The allocations for the purchase of debt securities among FIIs were fully sold a few weeks ago. This is despite India seeing more foreign direct investment this year from consumer and pharmaceutical companies, airlines and so on than ever before, with the exception of the BP-RIL deal in 2011.
Apart from this, Moody's reiterated the country's investment-grade rating a few days ago.
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India is among the five largest economies on the basis of purchasing power parity, and is among the most open with international trade now nearly 50 per cent of GDP. Clearly, it can no longer be insulated from global market and risk developments.
Sure, economic growth hit a record low of 5 per cent in the financial year ended March 2013 and slowed to 4.4 per cent in the first quarter. But apart from China, India still has the highest growth rate among all economies with a GDP of around $2 trillion or more. Yet, it has had the worst-performing currency in its peer group since May, when talk started about the Federal Reserve tapering its bond-buying programme.
It would appear that sentiment got the better of objective analysis. India's net equity inflows amount to $12 billion since the beginning of the calendar year, while there's been a much smaller outflow from debt investors. But we perceive a crisis of confidence among foreign institutional investors (FIIs).
The allocations for the purchase of debt securities among FIIs were fully sold a few weeks ago. This is despite India seeing more foreign direct investment this year from consumer and pharmaceutical companies, airlines and so on than ever before, with the exception of the BP-RIL deal in 2011.
Apart from this, Moody's reiterated the country's investment-grade rating a few days ago.
Dropping Like a Stone
The Indian currency's plunge isn't in line with peers — the drop has been too hard and too fast. The rupee's weakness relative to emerging market weakness is 7-10 per cent. If the rupee had weakened in line with its peers, it would be at 58-60 against the dollar now. At roughly 60, it compensates for a near-decade of inflation differentials at the wholesale price index (WPI) level.
Meanwhile, the current account deficit — such a bogey a few months ago — has narrowed to less than $5 billion a month, and is probably closer to $3 billion as the gold import squeeze has begin to work. There's anecdotal evidence that gold imports are down dramatically, by as much as 70-80 per cent, which means that government measures are having the impact they were supposed to.
Apart from this, the freeing up of interest rates on NRI deposits will be a big success: the median amount that will be raised is seen at $10-12 billion. The easing of external commercial borrowing norms for companies could be another big winner. The fears of short-term debt not getting rolled over are overblown. NRI deposits did not shrink in 2008-09 and will only go up this year.
Trade credit fell $20-30 billion right after the global financial crisis as banks deleveraged. There is no such crisis now and the banks are much better capitalised. As for prices, inflation based on the consumer price index, excluding fuel, will trend down with kharif crops coming to the market. Core inflation at the WPI level, meanwhile, is well below 5 per cent.
Double Trouble
As for global factors, emerging markets as a class will benefit from the US recovery as also a modest European revival ahead of expectations. In a simplistic sense, the move from 60-63 against the dollar was due to the NSEL crisis and concern over policy responses, while the move from 63 to 68 and beyond was a slide on low liquidity fuelled by panic.
The rupee's reversal should take the same path: a move up to 63 against the dollar with relief and confidence coming back, and then a slower appreciation to 60 as markets steady after the plans on tapering are known at next week's Federal Open Market Committee meeting.
No Tapering Tunnel
It is worth mentioning that if we look at the commentary in mid-May on what the taper might lead to, we are already pretty much already there. Ten-year US Treasury rates are at nearly 3 per cent, and 30-year, fixed-rate mortgages are above 4.5 per cent. Any further rate increases will put the US recovery itself at risk, so the taper effect has already manifested itself in the markets.
(The writer is CFO, Reliance Industries. Views are personal)
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