As the rupee touched an all-time low of 72.67 against the dollar in early trade on Monday, hitting stocks and driving up bond yields, a concerned government is considering floating non-resident bonds and steps to narrow the current account deficit (CAD) to prop up the domestic currency, according to senior officials. The NRI bonds could be announced “at short notice”, one official said.
Although the country has adequate foreign exchange reserves to deal with volatility in the currency market, other options may also be announced, said one of the officials. “More measures will be taken, if required. It is wrong to say the Reserve Bank of India (RBI) lacks reserves to deal with the rupee’s fall,” he said, adding that both the finance ministry and the RBI are closely monitoring the situation. Analysts saw the RBI intervening to stem the rupee’s slide on Monday too.
While the size of the NRI bond issue is still unclear, a Bank of America Merrill Lynch report last week said the RBI could issue such bonds worth $30-35 billion in the December quarter. These are typically forex deposits raised from NRIs at attractive rates for three to five years, with some lock-in and an implicit central bank guarantee.
Analysts have said instead of using up forex reserves, India should raise money via NRI bonds as it did in 2013. Bank of America Merrill Lynch chief economist Indranil Sengupta has argued that a $30-35 billion issuance would change investors’ perception of the rupee and help stabilise it. He pointed out that all the three NRI issuances (1998, 2000 and 2013) had staved off contagion in the past while an interest-rate defence had only partial success in one case — when Bimal Jalan was RBI governor. In 2013, when the rupee hit 68.85 after the taper tantrum talk by the US Federal Reserves, the RBI was forced to launch the maiden NRI bonds and mopped up $30 billion with a three-year maturity.
However, people need not resort to panic buying of dollars as the speculations that the rupee could slide to even 79-80 against the greenback are unfounded, said another official. He also ruled out an excise duty cut in fuel at the moment, saying it will impact fiscal deficit to that extent. States, he said, have greater leeway to cut taxes on fuel and give relief to people, as they are major beneficiaries of these imposts.
The rupee partly reversed the early-trade slide to close at a new low of 72.46 on Monday on suspected RBI intervention, still down 72 paise from the previous close. The domestic currency has lost around 13% in 2018. A depreciating rupee hit the stock market as well where investors lost Rs 1.96 lakh crore on Monday, with the Sensex having closed down 467.65 points.
The government is also exploring ways to reduce the CAD, which is expected exerts pressure on the rupee, through better trade balance. This means import duties on certain items may be raised. Some analysts have forecast the CAD to worsen to 2.5% of GDP this fiscal, against 1.9% in 2017-18, mainly due to elevated oil prices. A weak rupee will make imports more expensive, make import-sensitive manufacturing costlier and push up inflation.
Given this situation, analysts said they won’t be surprised if the monetary policy committee hiked the benchmark lending rate again in October, having already raised the repo rate twice in the last couple of policy review meetings by 25 basis points each.
A Securities and Exchange Board of India-appointed panel has already proposed substantial easing of its controversial April circular on the beneficial ownership of offshore funds after protests by investors who had said any such move could potentially cause capital outflows of $75 billion.
Forex reserves have dropped from a record high of $426.08 billion as of April 13 to $400.1 billion as of August 31 on suspected intervention by the central bank to curb rupee volatility in recent months. However, the reserves are still more than enough to deal with the current situation, according to the finance ministry officials. Foreign portfolio investors (FPIs) were net buyers of equities and debt last year, with net inflows of around $27 billion as of December 29 from a year earlier. However, they turned net sellers this year, with net outflows of around $7 billion up to August 31.
The threat to the rupee comes from a range of factors. Rising US interest rates have already driven out significant foreign money from the bond markets, while Chinese firms listing in global benchmark indices like MSCI will also weigh on FPI inflows into India. Worsening relations between the US and Turkey, the American sanctions on Iran, elevated oil prices and the trade war between the US and China have discouraged capital inflows into emerging economies like India and weighing on their currencies. Uncertainties surrounding the 2019 elections add to the problems.
Swiss brokerage UBS has forecast that the rupee could touch 73 to the dollar by March and the consolidated fiscal deficit (both Centre and states) could hit 6.5% in FY19, against the budget estimate of 5.9%. Moody’s said on Monday sustained weakening of the rupee is “credit negative” for Indian companies which generate revenue in rupees but rely on US dollar debt to fund their operations. However, of the 24 Moody’s-rated India-based companies across the high-yield and investment-grade categories, 12 generate most of their revenue in US dollars or have contracts priced in US dollars, providing a natural hedge, thus limiting the effect of the rupee on their cash flows, it said.