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Aug 20, 2013, 10.28AM IST
Rupee falls to record low of 64.13 before RBI steps in; Sensex falls 150 points
MUMBAI: The rupee
slumped to a record low in early trade on Tuesday and bond yields hit
another five-year high as Asia's third-largest economy bore the brunt of
growing money flows out of emerging markets.
The rupee slumped
as much as 1.6 percent to 64.13 to the dollar, adding to its 2.3
percent rout on Monday, before traders said the RBI was seen stepping in
to sell dollars.
Markets are bracing for further losses, with 1-month non-deliverable forward trading at 64.71.
The rupee extended losses
past 64 to a dollar on continued concerns about how India will fund its
current account deficit (CAD ).
Definition of 'Current Account Deficit'
Occurs when a country's total imports of goods, services and
transfers is greater than the country's total export of goods, services
and transfers. This situation makes a country a net debtor to the rest
of the world.
The balance of payments (
BOP) is the place
where countries record their monetary transactions with the rest of the world. Transactions are either marked as a
credit or a
debit. Within the BOP there are three separate categories under which different transactions are categorized: the
current account, the
capital account
and the financial account. In the current account, goods, services,
income and current transfers are recorded. In the capital account,
physical assets such as a building or a factory are recorded. And in the
financial account, assets pertaining to international monetary flows
of, for example, business or portfolio investments, are noted. In this
article, we will focus on analyzing the current account and how it
reflects an economy's overall position.
The Current Account
The balance of the current account tells us if a country has a
deficit or a
surplus.
If there is a deficit, does that mean the economy is weak? Does a
surplus automatically mean that the economy is strong? Not necessarily.
But to understand the significance of this part of the BOP, we should
start by looking at the components of the current account: goods,
services, income and current transfers.
1.
Goods - These are movable and physical
in nature, and in order for a transaction to be recorded under "goods", a
change of ownership from/to a resident (of the local country) to/from a
non-resident (in a foreign country) has to take place. Movable goods
include general merchandise, goods used for processing other goods, and
non-monetary gold. An export is marked as a credit (money coming in) and
an import is noted as a debit (money going out).
2.
Services - These transactions result
from an intangible action such as transportation, business services,
tourism, royalties or licensing. If money is being paid for a service it
is recorded like an import (a debit), and if money is received it is
recorded like an export (credit).
3.
Income - Income is money going in (credit) or out (debit) of a country from salaries, portfolio investments (in the form of
dividends,
for example), direct investments or any other type of investment.
Together, goods, services and income provide an economy with fuel to
function. This means that items under these categories are actual
resources that are transferred to and from a country for economic
production.
4.
Current Transfers - Current transfers
are unilateral transfers with nothing received in return. These include
workers' remittances, donations, aids and grants, official assistance
and pensions. Due to their nature, current transfers are not considered
real resources that affect economic production.
Now that we have covered the four basic components, we need to look at
the mathematical equation that allows us to determine whether
the current account is in deficit
or surplus (whether it has more credit or debit). This will help us
understand where any discrepancies may stem from, and how resources may
be restructured in order to allow for a better functioning economy.
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Aug 21, 2013
Rupee recovers after hitting record low of 64.13/dollar
The rupee
fell past 64 to the dollar for the first time on Tuesday and bond
yields spiked to a five-year high before the Reserve Bank of India (RBI)
stepped in to support the currency, as Asia's third-largest economy
bore the brunt of the global emerging markets selloff.
Underscoring how hard it is for New Delhi to
push through reforms despite the urgency of a deteriorating economic
outlook, parliament was adjourned on Tuesday due to protests by members
over a corruption scandal.
The
notoriously dysfunctional Lok Sabha was due to debate a bill to allow
foreign investment in the fledgling private pension industry, a reform
seen as key to government efforts to attract investment and narrow the
current account deficit, which is exacerbating the currency crisis.
"India's
problems are nowhere near resolution because New Delhi has not done
anything - there is no focus on improving productivity, infrastructure
or getting FDI (foreign direct investment) back," said Nomura credit
analyst Pradeep Mohinani in Hong Kong.
"It's all about stemming the flow of currency and that is not the cause of the problem," he said.
However,
India managed to sell $9.3 billion worth of government debt limits to
foreign institutional investors, although at rock bottom prices, a sign
that they hold out hope of improving market conditions.
Foreigners
have offloaded $10 billion in Indian debt since May 22, when the U.S.
Federal Reserve first signalled its intention to begin scaling back its
quantitative easing. They now hold only 43 percent of the $30 billion
limit available to them in Indian government debt.
The
rupee slumped as much as 1.6 percent to an all-time low 64.13 to the
dollar, but recovered most of its losses to close at 63.25/26, down
about 0.2 percent on the day, after sustained central bank dollar sales
in both the spot and forward markets.
Stocks
also recovered after hitting near-year lows, with the main share index
closing down 0.34 percent. Earlier, JPMorgan downgraded Indian equities
to "neutral" from "overweight", citing strains in the balance of
payments, while Citi cut its Sensex target to 18,900 from 20,800.
Bond
yields spiked to 9.48 percent, a level not seen since before the Lehman
Brothers crisis in 2008, before stability in the rupee helped them
recover. Yields closed down 33 basis points on the day, snapping a
five-day rise for their biggest single-day fall since May 2010.
BORROWING RATES RISING
A
spate of measures by the central bank and government has failed to halt
the rupee slide, with liquidity tightening measures aimed at making it
harder to short the currency pushing up borrowing rates and battering
corporate and investor sentiment.
State-run
oil firms, the largest dollar buyers in the forex market, face a
deterioration in credit quality if they have to share a higher burden of
the country's fuel subsidies due to rising crude prices and a falling
rupee, Moody's said.
Srei BNP
Paribas, an equipment finance company, on Tuesday raised its benchmark
lending rate by 50 basis points to 17.75 percent, citing a continued
rise in borrowing costs. Several Indian banks have also raised lending
rates in recent weeks.
"Our rate
hike has become imperative to maintain the quality of our portfolio,"
D.K. Vyas, chief executive officer at SREI BNP Paribas, said in a
statement.
WEAK GOVERNMENT, WEAK ECONOMY
Prime
Minister Manmohan Singh's weak coalition government, heading into
national elections by next May, has been hamstrung from pushing through
reforms to attract more long-term capital and close a record-high
current account gap that has made India vulnerable to flows away from
emerging markets.
Since Singh's
government took office for a second term in 2009, the parliament has
been the least productive in nearly three decades, according to PRS
Legislative Research.
Instead,
India has been limited to piecemeal measures such as Monday's move to
increase the foreign direct investment cap in asset reconstruction
companies to 74 percent from 49 percent, and a ban on the duty-free
import of flat-screen TVs from August 26.
On
Tuesday, the RBI simplified rules for investment in shares and debt of
Indian companies listed on local exchanges by non-resident Indians.
The
rupee's plunge also adds to worries about whether Finance Minister P.
Chidambaram will be able to meet his goal to pare the fiscal deficit to
4.8 percent of gross domestic product (GDP) this fiscal year.
Rating
agency Moody's said that while the rupee depreciation was a new
variable for the economy, the factors underpinning it have been
incorporated in its investment grade rating for India.
India is at the lowest investment-grade sovereign rating.
"We
believe that meeting the fiscal deficit target will be very challenging
this year, given lower than anticipated growth holding back revenue
growth and steep rupee depreciation raising the subsidy bill on imported
goods," analyst Atsi Sheth said in an e-mailed reply to queries from
Reuters.
(Additional reporting by
Umesh Desai in HONG KONG, Archana Narayanan, Neha Dasgupta, Suvashree
Dey Choudhury and Abhishek Vishnoi in MUMBAI, and Frank Jack Daniel in
NEW DELHI; Editing by Tony Munroe & Kim Coghill)
After
opening higher at 64.30 in the foreign exchange market, the rupee
immediately dropped to a low of 64.75 on initial weakness in equities.
It rebounded and shot up at the fag end to settle at 63.20, a rise of
135 paise or 2.09 per cent. Previously, it had flared up by 152 paise,
or 3.08 per cent, on May 18, 2009.
"Nationalized banks were
selling dollars, probably on behalf of the Reserve Bank. Corporates also
sold dollars today as they expect that the government and the RBI are
serious towards curbing volatility in forex market," said Agam Gupta,
managing director and head of fixed income trading at
Standard Chartered Bank.
Barclays
cut its forecast of India's FY13-14 current account deficit to about
%68 billion from about $80 billion earlier and said the country may be
able to almost fully fund the CAD. It said the rupee may recover to
about 61 per US dollar in the next 12 months, largely on the back of a
narrowing CAD.
The benchmark S&P BSE sensex gained 206.50
points, or 1.13 per cent, after yesterday's 2.27 per cent rise. Foreign
institutional investors pulled out Rs 1,277.64 crore on Thursday, as per
provisional data with stock exchanges.
The dollar index was up by 0.10 per cent against its major rivals ahead of the Federal Reserve's annual gathering.
Aug 23, 2013, 06.04PM IST
Rupee bounces back to 63.20 vs dollar, 2nd biggest rise in decade
The
rupee hit a series of record lows in the week, falling as much as 65.56
to a dollar, making its Asia's worst performer so far in 2013.
MUMBAI: After the government's pep talk, the
rupee on Friday made a stunning comeback, snapping a six-session losing streak to rise by 135 paise and close at 63.20, its second-biggest rise in a decade in absolute terms.
Comments from the government and the Reserve
Bank of India,
which came after the rupee slid to an all-time intra-day low of 65.56
yesterday, boosted sentiment and also helped local shares rally.
Finance
minister P Chidambaram on Thursday said the rupee is undervalued and
has overshot appropriate levels while asserting there is no need for
excessive and unwarranted pessimism. The Reserve Bank said it has
adequate foreign exchange reserves to deal with the declining rupee.
August 28, 2013 19:20 IST
Rupee sinks to new low of 68.85, logs biggest single-day loss
The Indian rupee slumped to a record low near 69 to the dollar on Wednesday on growing worries that foreign investors will continue to sell out of a country facing stiff economic challenges and volatile global markets.
The pummelling in markets sent the rupee reeling 3.7 percent to an all-time low of 68.85 with the unit closing just a touch off that, at 68.80/81 per dollar, its biggest single-day fall since October 1995.
It closed on Tuesday at 66.24/25.In absolute terms too, the 256-basis-point fall in the rupee was the biggest ever.
An assault on the psychologically key 70 level now appears imminent, as intervention from the central bank seen mid-morning only gave the rupee a brief respite.
In the stock market, state-run Life Insurance Corp, which was spotted buying shares, allowed the domestic benchmark index to erase steep early losses and end the day stronger."If steps are not taken to implement the reforms necessary to tackle the structural issues, the government will be left with the so-called '3D options': debt default, devaluation, deflation," said Angelo Corbetta, head of Asia equity for Pioneer Investments in London."
In India, devaluation is happening now and deflation could be about to start.
The good news is that the debt default is highly unlikely."Foreign investors have sold almost $1 billion of Indian shares in the eight sessions through Tuesday - a worrisome prospect given stocks had been India's one sturdy source of capital inflows in the first half of 2013. If more foreign investors throw in the towel, traders fear it will put the country in a vicious cycle in which the hit to confidence in turn slams shares and the currency even harder.
Policymakers have consistently struggled to come up with steps that can convince markets they can stabilise the rupee and attract funds into the country despite extraordinary measures last month by the central bank to drain liquidity and action to curb gold imports and cut India's huge oil import bill.
Rising oil prices, fed fears amplify pressure
India badly needs foreign capital as it struggles with a record high current account deficit, growing fiscal pressures and an economy growing at the slowest in a decade.
The failure to address India's economic challenges is becoming an increasing source of tension at a time when fears of a possible U.S.-led military strike against Syria are knocking down Asian markets, with the prospect that the Federal Reserve will soon end its prolonged period of cheap money further raising concerns.
At the same time, rising domestic bond yields threaten to raise borrowing costs across the already slowing economy, while global prices of oil and gold - the country's two biggest imports - have surged this week.
"The end game for the current decline would be the day the rupee stops falling, alongside government measures like a substantial diesel price hike," said Samir Arora, a fund manager at Helios Capital in Singapore.
BNP Paribas on Wednesday slashed its economic growth forecast for India for the fiscal year to March 2014 to 3.7 percent from its previous 5.2 percent - the weakest growth since 1991-92 when India buckled under a balance of payments crisis that required a loan from the International Monetary Fund."India's parliament remains toxically dysfunctional with little, if any, business conducted," BNP said.
"And, with next year's general election looming ever nearer, the government's willingness to instigate a politically unpopular fiscal tightening is close to nil."
India is due to post April-June gross domestic product data on Friday, with analysts estimating the economy grew at an annual rate of 4.7 percent, roughly in line with the previous quarter. It will also post July federal fiscal deficit figures.
Lacking Confidence
The rupee has plunged more than 20 percent this year, by far the biggest decliner among the Asian currencies tracked by Reuters.
India's main National Stock Exchange index fell as much as 3.2 percent, although suspected buying by LIC led the index to recover in the afternoon.Foreign investors are paring equity positions, having sold a net $3.6 billion in stocks since the start of June, but still their net purchases so far this year total nearly $12 billion.
Among the blue chips that fell the most on Wednesday were Axis Bank Ltd and ICICI Bank Ltd, a concern given foreign investors had so far largely held on to their investments in lenders, owning more than 40 percent of
each.In bond markets, foreign investors have sold more heavily, with outflows reaching nearly $4.6 billion so far this year.
Yet the government has so far failed to provide a coherent response, analysts said. Its approval of infrastructure projects on Tuesday was trumped by concerns about the fiscal deficit after India's lower house of parliament this week approved a 1.35 trillion rupees ($19.6 billion) plan to provide cheap gain to the poor.
In its latest initiative, the government late on Tuesday proposed setting up a task force to look into currency swap agreements, a measure analysts said could bring some relief if carried out in time by reducing market demand for dollars or other major currencies.
"Let's see what the authorities do, but if the government can come out with some really big currency swap arrangement with some countries, that can be a strong positive," said Uday Bhatt, a forex dealer with UCO Bank in Mumbai.
