By Kartik Goyal & Jeanette Rodrigues - Aug 18, 2013 9:33 PM PT
A trader reacts while working in a brokerage house in Mumbai, India. Photographer: Prashanth Vishwanathan/Bloomberg
Manmohan Singh, India's prime minister, said in a speech on Aug. 15 marking India’s Independence Day that slow growth won’t last long. Work on ports, airports, industrial corridors and rail projects will start in coming months, he said. Photographer: Tomohiro Ohsumi/Bloomberg
India’s biggest stock market slide in almost two years, surging bond yields and an unprecedented plunge in the rupee are pressuring officials for fresh steps to stem capital outflows and revive a struggling economy.
The S&P BSE Sensex (SENSEX) Index sank 0.8 percent as of 9:43 a.m. in Mumbai, extending the 4 percent loss on Aug. 16, while the rupee touched an all-time low of 62.46 per dollar. The yield on the government bond due May 2023 rose 8 basis points to 8.98 percent, the highest on a 10-year note since 2008.
A roadside vendor talks to a customer as he stands beside his fruit stall in Srinagar. India will “remain exposed to funding risks” if the current-account deficit exceeds 2.5 percent of GDP and consumer-price inflation stays above 7 percent, according to Chetan Ahya, a Morgan Stanley economist in Hong Kong. Photographer: Brent Lewin/Bloomberg
Aug. 19 (Bloomberg) -- Binay Chandgothia, managing director and portfolio manager at Principal Global Investors in Hong Kong, talks about the outlook for emerging market stocks. Chandgothia also discusses Japan's economy and stock market. He speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)
A trader reacts while working in a brokerage house in Mumbai, India. Photographer: Prashanth Vishwanathan/Bloomberg
Manmohan Singh, India's prime minister, said in a speech on Aug. 15 marking India’s Independence Day that slow growth won’t last long. Work on ports, airports, industrial corridors and rail projects will start in coming months, he said. Photographer: Tomohiro Ohsumi/Bloomberg
The market rout underscores the failure of months of measures to contain outflows, from higher interest rates to gold import curbs. Foreigners sold a net $3 billion of Indian stocks and bonds in July as the slowest growth in a decade madeAsia’s third-largest economy vulnerable to a pullout of funds from emerging markets, spurred by speculation the U.S. Federal Reserve will cool stimulus.
“The market is questioning the effectiveness of policy makers’ moves and the options available to them,” said Priyanka Kishore, a strategist at Standard Chartered Plc in London. “Earlier, the government said it had a grand plan. This is what the market expected, but the final measures disappointed.”
The currency has weakened about 26 percent versus the dollar in the past two years. The tumble has brought back memories of the early 1990s crisis, when the government received an International Monetary Fund loan as foreign reserves waned.
Policy Concern
India won’t face a repeat of that situation as it has enough reserves for about seven months of imports, compared with 15 days back then, Prime Minister Manmohan Singh said last week.
“Our primary concern is that the policy authorities still don’t ‘get it’ –- thinking this is a fairly minor squall which will simmer down relatively quickly with fairly minor actions,” Robert Prior-Wandesforde, an economist at Credit Suisse Group AG inSingapore, wrote in a note. “If this remains the case, then a swift move to 65 against the U.S. dollar is probable, which in turn should help focus minds.”
The current-account gap widened to 4.8 percent of gross domestic product in the 12 months ended March. The Reserve Bank of India estimates the sustainable level is 2.5 percent of GDP.
“Slow growth, high inflation, a high fiscal deficit and high current-account deficit all point to the inescapable conclusion that India’s problems are deep and structural,” said Prasanna Ananthasubramanian, an economist at ICICI Securities Primary Dealership Ltd. in Mumbai.
Staunch Outflows
While other developing nations are also striving to staunch outflows, the rupee’s 12 percent fall in the past three months is the worst after the 15 percent decline in Brazil’s real in a basket of 24 emerging markets tracked by Bloomberg.
The Reserve Bank of India since mid-July has raised the marginal standing facility and bank rates, capped cash injections into the banking system and tightened lenders’ daily reserve requirements to curb the supply of rupees, seeking to shore up the currency’s value.
The government has also raised taxes on gold imports to try and narrow the trade imbalance. It plans to allow some state companies to issue quasi-sovereign bonds to garner inflows to help finance the current-account gap.
The monetary authority targeted outflows on Aug. 14, cutting the amount Indian companies can invest abroad without approval to 100 percent of their net worth from 400 percent, and saying residents can remit $75,000 each financial year compared with a previous limit of $200,000.
‘Funding Risk’
Finance Minister Palaniappan Chidambaram said last week curbs on gold and silver imports and plans to compress inward shipments of non-essential items will trim the current-account gap to $70 billion, or 3.7 percent of GDP, this fiscal year.
India will “remain exposed to funding risks” if the current-account deficit exceeds 2.5 percent of GDP and consumer-price inflation stays above 7 percent, according to Chetan Ahya, a Morgan Stanley economist in Hong Kong.
Global funds have cut holdings of rupee debt by about $10 billion since May 22, when U.S. Fed Chairman Ben S. Bernanke said $85 billion a month of debt purchases could be reduced if America’s jobs market shows sustained improvement.
India’s economy may expand 5.5 percent in the year through March 2014, compared with 5 percent in the previous 12-month period, the central bank estimates. That lags behind the 10-year average of about 8 percent as well as the performance of neighbors from Indonesia to thePhilippines.
Repair Image
Singh said in a speech on Aug. 15 marking India’s Independence Day that slow growth won’t last long. Work on ports, airports, industrial corridors and rail projects will start in coming months, he said.
The premier is seeking to repair the image of his government and the ruling Congress party before elections due by May. Graft scandals, clashes with coalition partners and the risk of a credit-rating downgrade have hurt his administration.
The government began reforms in September 2012 to restrain the budget deficit and ease restrictions on foreign investment in industries from aviation to retailing.
Etihad Airways PJSC agreed in April to buy a 24 percent stake in Mumbai-based Jet Airways (India) Ltd. for 20.6 billion rupees ($334 million), taking advantage of the changes. AirAsia Bhd. in March won approval to form a venture with Mumbai-based Tata Group to set up a local low-fare airline.
The latest Indian data show conditions akin to stagflation persist. Industrial production fell 2.2 percent in June from a year earlier. Consumer prices rose 9.64 percent year-on-year in July, the second fastest in the Group of 20 major economies.
The figures underscore India’s need to address structural issues such as “infrastructure bottlenecks, policy uncertainly and governance,” said Rupa Rege Nitsure, an economist at Bank of Baroda (BOB) in Mumbai.
To contact the reporters on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net; Jeanette Rodrigues in Mumbai at jrodrigues26@bloomberg.net
To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net
