The aggregate demand for cash from the Indian banks on Monday morning at the RBI window was R27,505 crore, about the same as the demand for cash throughout last week. In September 2008, the Monday after the Lehman Brothers? collapse, the demand for cash from the Indian banks had shot up to R90,000 crore. This is a big difference in the response of the Indian financial sector to the crisis of 2011 compared to 2008. There is also no sign, at least on Monday, that corporates have begun to check out from the liquid mutual funds to finance their immediate capital needs.
The sector has done its homework on the possible eventualities and that means while India will be part of the global fire-fighting to cool the impact of the US downgrade, there will be possibly no domestic bushfires to stamp out too.
That sense of relative comfort will however not be visible in the government. Unlike in September 2008, the Indian government is far weaker on policy matters?so weak, in fact, that it has not been able to announce either a continuation or name a new RBI Governor, when there is less than one month for Subbarao?s term to expire. Subbarao himself came in just as the Lehman crisis broke in 2008.
A lame duck Governor and a policy-paralysed government will now drive the Indian economy through an absolutely directionless global economic landscape. Not surprising that despite Goldman Sachs having upgraded India to market weight in its portfolio, investors on Monday fled from both equities and the rupee to the dollar. The NSE?s India Volatility Index, which depicts the expected market volatility over the near term (30 days), has shot up on Monday by over 15.8% from Friday?s close to 28.78, showing how fearful the market participants are over the developments in the coming months.
In this context, ignoring the uncertainty over the issue of tenure, Subbarao has done the right thing by issuing a very candid statement of his concerns, including that of capital outflows. The statement issued before the market opened this morning notes that the central bank has made an assessment of the ability of the forex reserve portfolio to meet potential forex requirements in the event of significant capital outflows. Even in the worst months of September to December 2008, RBI had baulked at stating the areas of concerns so forthrightly.
But, what next? The big problem facing the world is that the measuring rod for the financial sector has practically disappeared. From the simple calculations of how much a central bank has made on its investments in US bonds to the absolutely esoteric estimates of hedge funds on the returns generated for their clients, each was predicated on a base line, the returns made on the US bonds. With the papers downgraded to AA+, the benchmark has vanished. The situation is a bit like trying to estimate the time of the day without knowing the position of the zero longitude.
The gyration in every world market is a dreadful attempt by the investors and just about everybody now to figure out an alternative measuring rod. Since none exists, every investor of consequence will try to use one which makes him appear wealthier. This means the world will lurch about for quite some time.
For India, the chief source of happiness will again come from the relatively unaffected domestic demand. This is the wind that kept the growth sail blowing through 2008-09 and could again come in handy. But to meet the demand, Indian companies will need cash, largely from abroad, and the costs now threaten to rise. The fall in the attractiveness of US bonds will perversely add to the demand for the US dollar and the safe haven commodities like gold and oil.
This is a headwind that India will have to again muscle its way against. The weakness in the fortunes of the global leader should make India?s assets look better to bet on. But we have partially crippled ourselves by making the policy?and therefore corporate?environment hostile to investment.
Last week, a group of fund managers from abroad met FE in the background of the developing story in the US. They were clear that the global uncertainty made India and China the only growth story to bank upon. Wealth managers were keen to be here, and the events over the weekend will make them even keener. But the uncertainty in India and the corruption charge-induced stasis means as of now any effective move ahead is unlikely.
How will the downgrade impact the three big things India is developing? The first is a well-oiled market for agricultural goods that, in turn, depends on the expansion of the retail sector. Those investments should go through, but here again the government needs to announce its position on foreign investment in retail to reap the advantage. Portfolio investment could desert emerging markets but investments in agricultural commodities, which is what retail is largely about, will stay and that can give a huge boost to domestic service and agricultural sector.
The second is the opening up of the pension and investment sectors. The big lesson could be for the board of trustees of India?s largest pension fund, the Employees Provident Fund Organisation. In lesser degrees, the managers of other government-run pension and insurance funds are equally in thrall of the absolute safety of government debt. The lessons from the US downgrade could serve as an opportunity to sensitise them about how foolhardy these beliefs could be and so lead to the adoption of rules that expands the market for these products in India. But from abroad, in the short term, the fund flow to these sectors might get affected as investors prefer the safety of dollars and commodities.
Finally, the upsets in the global markets will now make foreign investors pore far more carefully over the financial mechanism the Indian government sets up to finance infrastructure investments. Basically, in a new world order, the challenges will need unconventional but fast responses to create an opportunity. The time to mull over options is over.
subhomoy.bhattacharjee@expressindia.com
