India needs to increase foreign currency holdings by at least 13 percent to help the rupee withstand greater global volatility in the next few months, according to HSBC Holdings Plc and Goldman Sachs Group Inc.
While India has been the lone BRIC accumulating reserves over the past year, its external debt cover is near the lowest in at least a decade as companies sought cheap loans overseas. That’s even after central bank Governor Raghuram Rajan boosted reserves by 29 percent to a record $355 billion since taking office in 2013 amid the so-called “taper tantrum.”
“If similar losses were to hit again, the import cover of reserves would remain adequate but the short-term external debt cover could fall notably,” HSBC economists Pranjul Bhandari and Prithviraj Srinivas wrote in a June 26 report. “And indeed, India’s main vulnerability has gradually transited from trade imbalance to indebtedness.”
With Greece’s possible exit from the euro and the U.S. Federal Reserve poised to raise interest rates, HSBC says Rajan needs to boost the war chest to $420 billion to help smoothly cover liabilities this year. Goldman Sachs said in March that $400 billion is needed.
The rupee has lost 2 percent this quarter, the third-worst performance among Asia’s most widely traded currencies, and India’s benchmark stock index is poised for its biggest quarterly loss in more than two years. The currency rose 0.1 percent as of 10:09 a.m. in Mumbai on Tuesday.
Rajan this month said he’d use his stockpile to withstand volatility after warning in February that borrowing in dollars is like playing “Russian roulette.”
Still, capital outflows mean it’ll be tough for him to raise them quickly. If he doesn’t, the rupee may slide and fan Asia’s second-fastest inflation.
Foreign funds sold a net $78 million of Indian stocks and bonds this quarter after inflows of almost $13 billion in the previous three months. India’s reserves covered about 69 percent of external debt at the end of December, compared with 109 percent in 2006, latest government data show.
India doesn’t expect a major impact from the Greece crisis and things should settle down in a day or two, Finance Secretary Rajiv Mehrishi told reporters in New Delhi on Monday. Central bank spokeswoman Alpana Killawala pointed to Rajan’s public comments on foreign exchange when asked for comment.
Better macro-fundamentals and higher foreign-exchange buffers “will allow us to see through that initial volatility, which will be there,” Rajan said on June 24. Earlier this month he said that India has “plenty” of reserves to withstand any market volatility.
“It’s difficult to argue that India would be less affected than its peers,” said Dariusz Kowalczyk, a Hong Kong-based strategist at Credit Agricole CIB. “But it will be less affected than it was in 2013.”