Re dives to 64, experts see no early rebound
Aug 21 2013 , Mumbai
FM locked in strategy meetings for three days
The Federal open market committee (FOMC) in the US is scheduled to release its July meeting minutes late on Wednesday night, another factor that’s going to weigh on the currency market.
Harihar Krishnamoorthy, FirstRand Bank treasurer, said, “Much depends on the FOMC minutes and the Fed’s decision on quantitative easing. If they talk of a accelerated pullback, the markets will fall, and if they suggest it will be continued for a while, market confidence will be back.”
The current account deficit (CAD) may decrease to 3.5 per cent of GDP following rising exports and lower imports. Still, India has to continue to depend on foreign flows.
In New Delhi, finance minister P Chidambaram held meetings for the third day in a row to draw strategies for the emerging situation. He held meetings with the top India officials of IMF, World Bank and Asian Development Bank apart from Reserve Bank of India governor-designate Raghuram Rajan and top officials of various ministries.
This was the first time all three India executive directors of the three multilateral agencies — Mukesh Prasad of the World Bank, Rakesh Mohan of the International Monetary Fund and Umesh Kumar of Asian Development Bank —met the finance minister under one roof. It was a scheduled meeting as part of the finance ministry’s annual interaction with the India representatives of the three organisations. But it came at a time when the government is grappling with a sharp depreciation of the rupee for several weeks now. Besides discussions on the Indian and global economies, the conference is understood to have focused on stepping up infrastructure funding to India by these agencies.
Andre De Silva, HSBC head of Asia Pacific rates research, said in a note, “Expectations of the Fed’s tapering of its QE programme have intensified concerns over the financing of CAD in India. According to the finance ministry’s estimates, India will need $70 billion in 2013-14 versus $88 billion in 2012-13 to finance CAD. Even though recent curbs on import items such as oil, gold and non-essential imports may help lower CAD, it will still be difficult to finance $70 billion without foreign portfolio/direct investments.”
With general elections due in May, lack of clarity on reforms and a waning interest in emerging market assets, it will be difficult to attract foreign funds of that scale.
The 10-year benchmark bond, opened the day on a positive note at 8.37 per cent and touched an intra-day low of 8.21 per cent.
But the weakening rupee wiped off the gains and the bond closed at Rs 91.60 with a yield of 8.41 per cent. On Tuesday, the bond had closed at Rs 88.97, implying a yield of 8.90 per cent.
RBI’s measures of August 20 may provide some temporary relief to the bond market, but banks still have government bonds in excess of the mandatory reserve requirement. The overnight call rate is around 10.4 per cent and banks are borrowing Rs 40,000 crore from RBI’s more expensive window, the marginal standing facility, at 10.25 per cent.
Deutsche Bank added to the scare in the forex market with a report that said the rupee might slide to 70. It said, “With foreign flows becoming scarce, inevitable and painful current account adjustments are under way, with interest rates rising, consumption and imports falling, and GDP growth decelerating. But the bottom may not be near; we see the ongoing feedback loop, under which financial market stress causes a major economic setback, which then causes further sell-offs, continuing for now.”
Interest rates in the US began to harden faster than in India. With the 10-year US treasury bond at 2.8 per cent and the interest rate differential with India vanishing, FIIs began to desert the Indian market.
Chetan Ahya of Morgan Stanley, said in a report, “We believe India will remain exposed to the trend of the US dollar and real interest rates as long as CAD remains higher than a more sustainable level of 2.5 per cent of GDP and consumer price inflation remains higher than 7 per cent. The rupee and interest rate environment in India will remain highly dependent on the trend in US real rates and the dollar.”