Goldman to Nomura Warn on Debt to Reserves Ratio: India Credit

Waterfront in Mumbai
A man walks along the waterfront at Nariman Point in Mumbai. “India is one of the countries with the most challenging macro imbalances,” analysts at Goldman, including London-based Thomas Stolper, wrote in a Sept. 30 note to clients. Photographer: Dhiraj Singh/Bloomberg

Reserve Bank of India data showed the highest ratio of short-term external debt to currency reserves in more than a decade, raising alarm bells at Goldman Sachs Group Inc. and Nomura Holdings Inc.

The $97 billion maturing in less than a year amounted to 34.3 percent of reserves as of June 30, the highest since at least March 2001, RBI figures released Sept. 30 show. The ratio was 146.5 percent during a balance-of-payments crisis in March 1991, according to the report’s partial data for the 1990s. Including longer-term debt, repayments due by June 2014 total $170 billion, or 60 percent of reserves. Indonesia’s comparable ratio is 55.8 percent.

Asia’s third-largest economy faces significant risk as banks and companies seek to refinance global borrowings, even as the government acts to trim the current-account deficit, Goldman wrote in a Sept. 30 research note. Nomura said the slowest economic growth in a decade and a budget deadlock in the U.S. will damp inflows, further straining India’s finances.

“We expect the focus to turn to India’s external vulnerability amid a worsening global backdrop,” Sonal Varma, an economist at Nomura in Mumbai, said in an Oct. 1 telephone interview. “The worst in terms of the quarterly current-account deficit is likely behind us.”

The deficit in the broadest measure of trade was $21.8 billion in April through June, compared with $18.1 billion in the previous quarter, the RBI said in a Sept. 30 statement. The median of 26 estimates in a Bloomberg News survey was for a $23 billion gap.

Deficit Outlook

Nomura predicts the widest shortfall among the largest emerging markets will narrow to 3 percent of gross domestic product in the fiscal year through March 2014 from a record 4.8 percent the previous period. Goldman analysts Tushar Poddar in Mumbai and Vishal Vaibhaw in Bangalore forecast a 3.5 percent gap as tariff increases curb gold imports and slower growth limits domestic demand. GDP increased 5 percent in the year ended March 31, official data show, the least in a decade.

The current-account deficit will drop to 4 percent of GDP this fiscal year, according to the median of 14 estimates in a Bloomberg survey of economists. However, the shortfall in the government’s budget will widen to 5.05 percent of GDP in the same period, from 4.9 percent the prior year, according to the median estimates in a separate survey, as Prime Minister Manmohan Singh boosts spending ahead of elections due by May.

Debt Outflows

Global funds have cut holdings of Indian debt by $11.5 billion to $26.9 billion since May 22, when Federal Reserve Chairman Ben S. Bernanke first flagged a potential paring of bond purchases. Since the Fed unexpectedly maintained its buying on Sept. 18, the figure is down $891.5 million. Foreign reserves fell to $277 billion in the week through Sept. 20 from $297 billion at the end of 2012, official data show.

“India is one of the countries with the most challenging macro imbalances,” Goldman analysts including London-based Thomas Stolper, wrote in a Sept. 30 note to clients. “High-frequency data on Indian capital flows indicate that, even after the dovish Fed surprise, the funding of the large Indian external deficit remains a challenge.”

Goldman is selling the rupee against the euro, betting it will weaken to 92 per euro from 83.9678 today. The Indian currency advanced 1.2 percent to 61.7400 per dollar today, and the yield on the 10-year benchmark bond fell nine basis points, or 0.09 percentage point, to 8.64 percent. Local markets were shut yesterday for a public holiday.

Fed Stimulus

Societe Generale SA on Oct. 1 closed its sell-rupee trade, saying global risk sentiment has improved after the Fed decision. BNP Paribas SA recommends investors buy the rupee, saying the partial shutdown of the U.S. government will likely prolong stimulus and boost the amount of cash available in the global banking system.

“Given the fact that you’re going to see such a disruptive end to the U.S. fiscal debate, the Fed may continue to feel that they have to do the heavy lifting in terms of supporting growth,” Mirza Baig, Singapore-based head of foreign-exchange and interest rate strategy at BNP Paribas, said in a Sept. 30 telephone interview.

Like Bernanke, new RBI Governor Raghuram Rajan will also be under pressure to manage the economy with little help from the government before next year’s elections, according to Skandinaviska Enskilda Banken AB, or SEB.

Rajan Policy

In his maiden policy review on Sept. 20, Rajan unexpectedly raised the benchmark repurchase rate to 7.50 percent from 7.25 percent to curb inflation and counter outflows. He said taming the fastest price increases among the largest emerging markets is his top priority.

Standard & Poor’s last month reiterated it may downgrade India’s debt rating to junk as fuel and food subsidies threatened Prime Minister Singh goal of curbing the government’s budget deficit. Credit-default swaps insuring the bonds of State Bank of India, a proxy for the sovereign, against non-payment for five years have climbed 140 basis points from the year’s low of 174 in May, according to data provider CMA.

“At least until the elections are done, Rajan is pretty much on his own,” Sean Yokota, head of Asia strategy at SEB in Singapore, said in a Sept. 30 telephone interview. “Considering India’s huge funding needs, I wouldn’t consider buying the rupee until we have clarity on Fed tapering.”