India Slump Pressures Singh to Boost Lowest BRIC ReservesUnni Krishnan
India’s weakest economic growth since 2009 escalates pressure on the government to increase the smallest foreign-exchange reserves among BRIC nations, as policy makers struggle to contain a sliding rupee.
The reserves have dropped about 13 percent to $278 billion since a 2011 peak and are equivalent to less than seven months of imports. Bank of America Merrill Lynch estimates India needs as much as 10 months of import cover for currency stability, a figure still about half the average in Brazil, Russia and China.
Prime Minister Manmohan Singh’s potential options to shore up confidence in the rupee include issuing India’s first dollar sovereign bonds, a deposit program to tap the country’s diaspora and bilateral currency-swap agreements. Boosting reserves could avoid the need to support the currency with further interest-rate increases that risk damaging efforts to revive investment.
“India needs to explore all possible funding options,” said Sonal Varma, an economist at Nomura Holdings Inc. in Mumbai. Rate increases may deter some capital inflows by worsening India’s slowdown, she said.
The rupee has slumped 18 percent versus the dollar in 2013 as India’s record current-account deficit made it vulnerable to an outflow of capital from emerging markets, spurred by the prospect of reduced U.S. monetary stimulus.
The currency fell 2 percent to 67.3337 per dollar as of 1:12 p.m. in Mumbai. The S&P BSE Sensex index of stocks slid 2.2 percent. The yield on the 7.16 percent government bond due May 2023 was at 8.43 percent from 8.46 percent yesterday.
Bank of America estimates a deposit program for India’s diaspora could raise as much as $20 billion, and sovereign dollar debt about $5 billion a year.
India’s other funding options include exploring currency-swap agreements with economies such as the U.S., China and the European Union, to add to the $15 billion arrangement with Japan, according to Nomura.
Rupee weakness has revived memories of India’s 1990s crisis, when the nation needed an International Monetary Fund loan as foreign reserves waned. Singh said last month growth will speed up and India won’t face a repeat of that turmoil.
The shortfall in India’s current account widened to an unprecedented $87.8 billion or 4.8 percent of gross domestic product in the fiscal year ended March. Gold and oil imports contributed to the imbalance in the broadest measure of trade.
India also had $172 billion of debt maturing within 12 months as of March 31, official data show.
If the government “tells us how it will finance or roll over the debt of $172 billion by March,” that might stabilize the rupee, said Manish Sonthalia, a fund manager at Motilal Oswal Asset Management Co. in Mumbai.
The Reserve Bank of India raised two interest rates in July, part of a cash squeeze to boost the currency. Banks from HSBC Holdings Plc to Goldman Sachs Group Inc. have since cut back their growth forecasts.
Expansion slowed to 4.4 percent last quarter from a year earlier as investment slid and consumer spending moderated.
Indian Finance Minister Palaniappan Chidambaram said last month some state financial companies would be allowed to issue “quasi-sovereign” bonds to garner dollars.
The government has also eased foreign investment curbs in industries such as aviation and retailing to woo funds, in a drive since 2012 to spur growth and avert a credit-rating cut.
Standard & Poor’s reiterated its negative outlook on India’s rating today. There’s a more than one-in-three probability of a downgrade within two years, Kim Eng Tan, a credit analyst at S&P, said at a briefing in Seoul. The rupee extended losses following the comments.
Fitch Ratings and Moody’s Investors Service have stable outlooks. All three rate India at the lowest investment grade.
Singh’s administration is also striving to pare the budget deficit. The fiscal burden of a bill expanding the provision of cheap grains to the poor is a cause for concern, DBS Group Holdings Ltd. said in a note today. The legislation was approved by the upper house of parliament late yesterday.
Chidambaram predicts a current-account gap of about $70 billion or 3.7 percent of GDP this fiscal year. He expects inflows to finance it and forecasts an accretion in reserves.
The government has raised taxes on inward shipments of gold and plans to compress imports of oil and some non-essential items. The Reserve Bank estimates the sustainable deficit level is 2.5 percent of GDP.
India’s reserves were $277.7 billion as of Aug. 23, equivalent to 6.7 months of import cover based on average monthly merchandise inward shipments of $41.4 billion in the year through July, RBI and government data show.
The holdings are adequate near term, Moody’s Investors Service said Aug. 19. China has $3.5 trillion of foreign reserves, Russia about $508 billion and Brazil $373 billion.
The RBI’s currency stabilization measures have raised funding costs and may weigh on Indian growth in coming months, HSBC said yesterday, lowering its forecast to a 4 percent expansion in 2013-2014 from 5.5 percent. Goldman now also projects a 4 percent rise in GDP, down from 6 percent earlier.
Elsewhere in the Asia-Pacific region, the Reserve Bank of Australia kept its benchmark interest rate at a record-low 2.5 percent. In the U.S., manufacturing probably expanded in August for a third month, according to a Bloomberg survey.