India’s attempt to boost economic growth while supporting the rupee is causing the biggest price swings in the currency in more than four years, increasing costs for companies from Bharti Airtel Ltd. to Larsen & Toubro Ltd.
The rupee’s three-month historical volatility rose to 11.76 percent, the highest level since February 2009, from this year’s low of 6.17 percent on June 5, while measures for stocks and government bonds also surged. The rupee tumbled 11 percent against the dollar in the past three months, making it the worst performer of 24 emerging-market currencies tracked by Bloomberg after Brazil’s real.
The Reserve Bank of India cut interest rates in May to stoke growth, raised them in July to shore up the rupee and then signaled another reversal in policy last week. Bharti Airtel, India’s largest mobile-phone operator, and Larsen & Toubro, the nation’s biggest engineering company, say currency losses eroded the latest quarterly earnings.
“What the RBI needed to do was to drive an unequivocal message that shoring up the rupee is the foremost policy priority, despite the flexibility it otherwise has,” Vishnu Varathan, an economist at Mizuho Bank Ltd. in Singapore, said in an Aug. 2 e-mailed response to questions. “Forward guidance is at best an inexact science and at worst a stab in the dark.”
The rupee fell to a record 61.8063 per dollar today, 12.4 percent weaker than its Dec. 31 level, data compiled by Bloomberg show. India’s currency will end the year at 62, according to Nomura Holdings Inc. and Macquarie Bank Ltd.
The RBI unexpectedly reversed a bias for policy easing on July 15 by restricting banks’ access to cash through its daily repurchase auctions, raising two interest rates and boosting lenders’ daily cash-reserve ratios. This drove the three-month interbank money-market rate above 11 percent.
The central bank surprised markets again on July 30 by indicating that the tightening is temporary and that it will switch its focus back to spurring growth once the currency stabilizes.
The RBI’s “apologetic” tone confused investors, Sonal Varma, an economist at Nomura in Mumbai, wrote in a July 30 research report. Policy makers failed to quell market volatility because they didn’t “come out with a heavy hand,” Benoit Anne, the head of emerging-markets strategy at Societe Generale in London, wrote in a July 30 e-mail response to questions.
Heightened swings in the rupee threaten to increase losses on corporate borrowings from abroad and raise the risk of defaults. Only half of local firms’ foreign-exchange exposure, which included $200 billion of outstanding overseas liabilities as of March 31, is hedged, Crisil Ltd., the local unit of Standard & Poor’s, said in a July 10 report.
India Ratings, the local arm of Fitch Ratings, said Aug. 1 that it may downgrade 65 of 290 investment-grade Indian issuers it tracks should the rupee remain weaker than 60 per dollar for “a sustained period.”
Bharti Airtel, based in New Delhi, reported on July 31 net income of 6.89 billion rupees ($112 million) for the fiscal first quarter, 9.6 percent lower than a year earlier and missing analyst estimates. The company recorded a 5.34 billion-rupee loss on currencies and derivatives.
Larsen & Toubro posted a foreign-exchange loss of 2 billion rupees for the same period, Chief Financial Officer R. Shankar Raman said at a July 22 press conference. New Delhi-based Hero MotoCorp Ltd., India’s top motorcycle maker, will see an “adverse impact” this quarter and next due to exchange-rate fluctuations, Chief Financial Officer Ravi Sud told analysts on a July 24 conference call.
JSW Energy Ltd., a Mumbai-based company that mainly uses imported coal to produce power, will now hedge the entire $300 million of credit it uses to pay for shipments, compared with one-third previously, Vice Chairman N.K. Jain told reporters on July 26.
Deepak Morada, a Mumbai-based spokesman at Larsen & Toubro, declined to comment. Officials at Bharti Airtel, Hero MotoCorp and JSW Energy didn’t reply to e-mail and mobile phone messages left after business hours yesterday.
The RBI has tried to stem the rupee’s decline to prevent inflation in a country that imports 80 percent of its oil and which is already running a record current-account deficit.
The shortfall in the broadest measure of trade widened to an unprecedented 4.8 percent of gross domestic product in the year ended March 31, official data show. India’s economy expanded 5 percent in the 12 months ending in March, below the 10-year average of about 8 percent, the Central Statistical Office in New Delhi said May 31.
The cost of hedging against currency swings has climbed to a record. The price of onshore contracts that fix the conversion rate for buying dollars with rupees in a year’s time touched an annualized 8.84 percent over the spot rate on July 24, up from the past year’s low of 5.36 percent on Oct. 19, data compiled by Bloomberg show.
The rupee’s losses have spurred outflows of $10.2 billion from local stocks and bonds in the last two months, according to the market regulator, driving the benchmark S&P BSE Sensex stock index down by more than 2 percent. The extra yield on three-year Indian company bonds over government notes jumped to 237 basis points, or 2.37 percentage points, on Aug. 2, the highest level since March 2009.
The surge in funding costs will delay an economic recovery and lead to more credit-rating cuts than upgrades for Indian companies, Crisil said in a July 25 report.
Fifty-day volatility on the 50-share CNX Nifty Index touched 19.6 percent July 18, the highest since April 2012, while a similar measure for 10-year Indian sovereign bonds jumped to 22 percent today, the most since June 2009, data compiled by Bloomberg show.
Demand for protection against swings in Indian lenders’ shares is rising as investors weigh the effect of the central bank’s new policies, according to Mirae Asset Global Investments (India) Pvt. The CNX Bank index’s implied volatility, used to gauge the cost of options, climbed 31 percent last month, data compiled by Bloomberg show.
“If you are not optimistic on the economy then you cannot be optimistic on banking stocks,” Anand Shah, the chief investment officer at BNP Paribas Asset Management India, which oversees about $650 million, said in a July 25 phone interview.
The RBI will maintain the tightening measures and curbs on currency trading as long as market volatility remains high, Governor Duvvuri Subbarao said July 30. The steps will be withdrawn “in a calibrated manner” once stability is restored, he said.
“This seems perfectly reasonable to us and, in fact, this type of early guidance addresses some of the concerns we had raised about their actions,” Marc Chandler, the global head of currency strategy at Brown Brothers Harriman & Co. in New York, wrote in an Aug. 1 research report. “Still, markets were not happy with the trade-off in currency stability for growth.”
Volatility in the rupee and other emerging-market currencies also worsened because of mixed messages from the Federal Reserve.
On May 22, the Fed indicated it could pare stimulus should the U.S. economy improve, and a month later Chairman Ben S. Bernanke said there’s no fixed schedule for scaling back the program. On July 31, he said the central bank would keep its $85 billion of monthly bond-buying. Federal Reserve Bank of Dallas President Richard Fisher said yesterday that policy makers are closer to slowing asset purchases.
One-month implied volatility in the rupee, a measure of expected moves in the exchange rate used to price options, has risen 330 basis points since May 31 to 12.53 percent.
“With no clear direction from the external environment, volatility in the markets is likely to continue,” Indranil Pan, an economist at Kotak Mahindra Bank Ltd. in Mumbai, said in a July 31 phone interview.