The growth shock to India’s economy from the coronavirus pandemic will trigger more weakness in the rupee, dragging it toward an unprecedented 80-per dollar level. That’s the view from Venkat Thiagarajan, who has traded currency markets for 26 years, and most recently served as the head of forex at Reliance Industries Ltd., which runs India’s largest corporate treasury. The rupee, he argues, has a stronger link with economic growth, and metrics like the current account, balance of payments and global dollar dynamics have a marginal impact in the medium term.
Thiagarajan’s bearish outlook stands out as there is growing market consensus that the rupee — Asia’s worst performer this year — will rebound on the back of strong overseas flows into Indian stocks and a chunky foreign direct investment into Reliance’s digital unit. That’s as the economy is set for its first annual contraction in more than four decades this year.
“In the context of severe growth contraction that one has never evidenced in the past, the rupee would tend to depreciate in keeping with that historic dynamic,” said Thiagarajan, 61, who retired last month from Reliance. “Any flow-based directional trade in either way doesn’t end well. The well-anticipated and well-advertised flows won’t swing the needle.”
His comments carry weight. Thiagarajan has seen Reliance emerge as one of the most prolific issuers and borrowers in the global debt markets during his 17-year stint at the oil-to-telecom giant. Controlled by Mukesh Ambani, Asia’s richest man, Reliance alone accounts for about 10% of India’s exports, which explains why traders closely watch its forex flows. Last year, the company is said to have sold bulk of the $5 billion in a forex swap with the central bank.
Global funds have piled $4.5 billion into local stocks this quarter, the highest in the region. A chunk of those flows is owing to a rights offering by Reliance and stake sales in Kotak Mahindra Bank Ltd. and Bharti Airtel Ltd. Another $15.2 billion is seen coming in by way of FDI inflows, thanks to a flurry of deals for Ambani’s digital unit, Jio Platforms Ltd.
Yet, the portfolio inflows have done little to arrest the decline in the rupee, which is down almost 6% in 2020. It is the only Asian currency to have weakened against the dollar this quarter even as its peers have rebounded sharply from the virus-induced selloff seen earlier in the year. Analysts have been citing the central bank’s aggressive mopping up of dollars, which has taken India’s foreign-exchange reserves past a record $500 billion, as one big reason for the currency’s sustained weakness.
“Flows are expected to happen soon and there’s been some degree of front running those flows by the speculative segment,” said Thiagarajan. “That explains the significantly strong accretion to the reserves.” With the virus outbreak adding pressure on the financial sector already strained by a shadow-banking crisis, authorities may prefer a weaker currency, said Thiagarajan.
“Growth contraction of such severe proportion has made policy making extremely difficult and in the absence of incremental room in fiscal and monetary policies, exchange-rate depreciation is the way of stimulating the economy,” he said.
Fitch Ratings Ltd. last week cut India’s outlook to negative, citing weak economic growth prospects and rising public debt, moving the nation’s credit score a step closer to junk. Moody’s Investors Service downgraded India’s rating to the lowest investment score earlier in the month. Debt levels in the economy are high and as private sector struggles to service the debt amid the sharp slowdown, the banking sector remains under stress, said Thiagarajan.
The rupee will end 2020 at 75 per dollar, according to the median estimate in a Bloomberg survey. The currency, which hit a record low of 76.9088 in April, ended at 75.6687 Thursday. “A stronger currency might not be tenable in an economy with a weaker financial sector,” he said.