Bloomberg News

Singh Opens Economy to Spur Rupee as 10% Drop Seen: India Credit

December 06, 2011

Nov. 28 (Bloomberg) -- Prime Minister Manmohan Singh is taking further steps to open up India’s economy to support the rupee as HSBC Holdings Plc and CLSA Asia-Pacific Markets predict the currency may slide another 10 percent.

Global funds may be allowed to buy company bonds without restrictions and foreign individual investors could purchase local shares, said Mumbai-based IndusInd Bank Ltd. Regulators raised deposit rates for Indians abroad last week and allowed Wal-Mart Stores Inc. and Tesco Plc to take majority stakes in retailers. The rupee will drop to 58 per dollar from a record- low 52.73 on Nov. 22 on concern India’s current-account deficit will widen, according to HSBC.

The 14.2 percent decline in the rupee, this year’s worst- performing Asian currency, is stoking price pressures by raising import costs and worsening a slump in sovereign bonds. Yields on the nation’s benchmark 10-year notes have risen 90 basis points in 2011 to 8.82 percent, compared with a drop of 22 basis points in China and 73 in South Korea.

“Anything that opens up the economy is positive for growth and risk assets like the rupee,” Tim Condon, the Singapore- based head of Asian research at ING Groep NV, said in an interview on Nov. 25. “But the origin of the problem is not India, so the rupee and any measures that India takes are hostage to the wider world.”

Singh was India’s first policy maker to open up the economy when he began a five-year term as finance minister in 1991. An economist by training, he cut import tariffs, allowed non-Indian companies such as Ford Motor Co. to set up manufacturing plants and removed regulations requiring government authorization for new factories. The moves were prompted by a surge in oil prices that depleted the nation’s foreign-exchange reserves.

Foreign Holdings Cap

Two decades later, Singh’s administration has raised the cap on foreign holdings of rupee-denominated debt by 20 percent to $60 billion, boosted the limit on the interest rates companies pay when borrowing abroad and removed a $100 million cap on inflows of foreign exchange via currency swaps. The measures were unveiled in November as the rupee weakened 6.6 percent, headed for the biggest monthly decline since November 1997.

“There has been very little economic reform in India since the early 1990s,” said Condon. “So the agenda is huge and implementing a part of it will be a positive.”

The government may consider scrapping the quota system it uses to restrict investment in rupee-denominated bonds issued by local companies, J. Moses Harding, an executive vice president at IndusInd Bank, said in an interview in Mumbai on Nov. 23. The Securities & Exchange Board of India assigns quotas for bond trading to reduce volatility. Curbs include minimum lock-in periods and mandatory reinvestments. Two phone calls made to N. Hariharan, a Mumbai-based SEBI spokesman, went unanswered.

Sell Dollars

The Reserve Bank of India may also sell dollars directly to oil refiners to reduce demand for foreign exchange in the currency market, Rohini Malkani, a Mumbai-based analyst at Citigroup Inc., wrote in a note to clients on Nov. 24. Three phone calls made to Malkani’s office weren’t answered.

There is also speculation that the government may allow companies to borrow more abroad after Thomas Mathew, joint secretary in charge of capital markets in the Finance Ministry, said this month that policy makers expect “upward pressure” on the $30 billion annual limit on so-called external commercial borrowings.

Sensex Drops

India’s benchmark Sensitive Index of shares has slid 10.5 percent this month as global investors sold $663 million more local shares than they bought through Nov. 24, according to exchange data. The government may allow individual foreign investors to directly buy domestic shares, Finance Secretary R. Gopalan told reporters in New Delhi on Nov. 15 without providing a timeframe. Finance Ministry spokesman D.S. Malik declined to comment on the matter when contacted on Nov. 25.

The rupee slumped for a fourth straight week last week on concern Europe’s debt crisis will damp demand for emerging- market assets, slowing global growth and sapping revenue for India’s government as well as demand for exports. The currency advanced 0.2 percent today to 52.14 per dollar after falling 1.8 percent last week, according to data compiled by Bloomberg.

India’s benchmark bonds were little changed after falling on Nov. 25. The yield on the 8.79 percent securities due in November 2021 was unchanged at 8.82 percent.

‘More Measures’

“There is a sense that the RBI now wants to stay ahead of developments in Europe,” Kamlakar Rao, the Mumbai-based head of currency trading at state-run Allahabad Bank, said in an interview on Nov. 25. “The central bank could announce more measures, like possibly raising the limit on overseas borrowings.”

India’s bonds have underperformed debt in the region as inflation that has held above 9 percent for 11 months crimped returns. Rupee-denominated notes have returned 2.8 percent this year, the worst performance among 10 Asian local-currency debt markets monitored by HSBC Holdings Plc.

Global funds have cut holdings of the nation’s debt even as the yield premium on rupee notes over U.S. debt increased in November. International investors’ ownership of local bonds has fallen $205 million since the end of October to $21.8 billion, according to exchange data. The average difference in yields between India’s 10-year debt and similar-maturity U.S. Treasuries was 683 basis points this month, compared with 658 basis points in October.

‘Smooth Volatility’

While sentiment toward the rupee has improved because of the measures announced by the government, a lot will depend on how Europe’s crisis plays out, according to HDFC Bank Ltd. The currency will appreciate 5.5 percent to end the year at 49.50 per dollar, according to the median forecast of 23 strategists’ estimates compiled by Bloomberg.

“The measures taken by the RBI will only smooth the volatility, not prevent the currency from weakening,” David Bloom, the London-based global head of currency at HSBC, said in an interview in Mumbai on Nov. 24. “If you open up a parachute while jumping out of an airplane, you can land safely but it doesn’t put you back in the plane.”

Germany’s Chancellor Angela Merkel and French President Nicholas Sarkozy have confirmed their support for Italy, Italian Prime Minister Mario Monti told a Cabinet meeting on Nov. 25, according to an e-mailed statement. The leaders of the euro area’s two biggest member states agree with Monti that Italy succumbing to the region’s debt crisis would spell the end of the euro, the statement said.

Default Swaps

The cost of protecting the debt of State Bank of India against non-payment has climbed after Finance Minister Pranab Mukherjee said last month that it will be a “challenge” to narrow the budget deficit to the targeted four-year low of 4.6 percent of gross domestic product in the year ending March.

Five-year credit-default swaps on State Bank, viewed as a proxy for the nation, rose 11 basis points to 363 basis points on Nov. 25, compared with 266 at the end of October. The swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.

India’s current-account deficit will be in focus as long as Europe’s debt crisis continues, worsening the outlook for the rupee, according to HSBC. The shortfall in the broadest measure of trade widened to $14.1 billion in the three months ended June, from $5.4 billion in the previous quarter, according to official data.

“We still have to wait and watch if the flows come in,” Ashtosh Raina, the Mumbai-based head of currency trading at HDFC Bank, said in an interview on Nov. 24. “The situation in Europe is grim and the way things go there will dictate how matters change for us.”

--Editors: Ven Ram, Arijit Ghosh

To contact the reporter on this story: Jeanette Rodrigues in Mumbai at

To contact the editor responsible for this story: Sandy Hendry at

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