The rupee may retrace up to 3% of its lost ground by the end of the calendar year, helped by the five-pronged strategy that the government announced to prop up the free-falling local currency, market participants expect. A majority of the respondents in an ET snap poll predicted the local unit to see some signs of gains this week following the announcement. But that could be short-lived, as they expect the rupee to swing both sides in a wide range through the year amid continuing global uncertainties, and even hit a new low. A meltdown in the Turkish lira and Argentine peso is clouding the prospects of emerging market investment, with investors seeking safe-haven assets.
Foreign investors pulled out more than ?49,000 crore since January from India’s equity and bond markets, even as the rupee lost about 11% to the dollar to be one of the worst performing emerging market currencies this year. Overseas Investors Wait for Details, The local currency hit a record low at 72.92 to the dollar last Wednesday, but has bounced back to close at 71.86 Friday amid reports of the government considering measures to arrest the slide.
“Overseas investors are on a waitand-watch mode amid emerging market weakness,” said Manish Wadhawan, managing director and head of fixed income at HSBC India, and one of the 12 participants in the poll. “They may not immediately rush to bet money unless the fine prints come out on the proposed measures (the Indian government plans to take).” But the rupee and bond yields could see some respite on Monday, as the government’s intension has helped allay investor apprehension, Wadhawan said.
Most of the respondents bet on the rupee's wide trading range till December-end. A majority of them have set a trading range of 69.50-73 to the dollar, with a few predicting even 68-75.
GOVERNMENT MEASURES
While the government talked about steps to curb non-essential imports and boost exports, currency traders were looking for stringent measures like an interest rate hike, floating of NRI bonds or opening of a special dollar window for oil companies that are the biggest importers. Foreign portfolio investors are, meanwhile, seeking more clarity on the five-pronged measures. They consider those related to non-essential imports and removal of debt investment cap as the most important ones.
“Curbs on non-essential imports will lead to permanent solutions in controlling CAD (current account deficit), paving way for sustainable overseas inflows over a period of time,” said MS Gopikrishnan, head of macro trading, South Asia, at Standard Chartered Bank. “While the measures would weigh on the markets on Monday, but for it to sustain, investors need more clarity,” he said. Ananth Narayan, associate professor of finance at SP Jain Institute of Management and Research, said India should look at long-term measures, such as to support the Make in India and Make for India programmes, to reduce the reliance on imports and support the currency.
The government has yet to clarify the items of the non-essential category, the imports of which will likely be discouraged with higher import duties. This measure should help cut the expanding current account deficit, or the excess of overseas spending over revenue. CAD was at a four-quarter high of 2.4% of gross domestic product in the April-June quarter on the back of rising crude oil prices. “It will be important to wait and see if any further meaningful measures are around the horizon,” said Ashish Vaidya, head of trading–India at DBS Bank. “Announced measures will have a marginal positive impact, but are not a game-changer.”
BOND EXPOSURE
The government also proposed to remove the exposure limits of up to 20% of an FPI bond portfolio to a single corporate group, and 50% to a single company. Overseas investors can invest in Indian corporate bonds up to Rs 2.67 lakh crore in a year. Last year, investors used up about 80-90% of the limit, but that figure has now dropped to 76% as global investors shied away from Indian corporate debt papers. “We should see some dollar inflows next few months,” said Jayesh Mehta, managing director at Bank of America-Merrill Lynch. Growth is key to bring in foreign capital to India. “The authorities should take measures which will improve the country’s growth, a key to attract global investors,” Mehta said.
In September, overseas investors net sold around Rs 9,400 crore of domestic equities and debt securities. A further rise in share prices may be limited, leaving little space for significant risk-returns for such investors in the short term. “Friday's news flow will not impact dollar flows immediately but it may have a medium-term impact,” said Piyush Garg, head of research at ICICI Securities. “Market will be driven by movement in emerging market currencies, movement in the rupee and oil prices.” Shares may gain about 2-3% from a sentimental boost, spurred by government measures, according to G Chokkalingam, founder of Equinomics Research & Advisory.
The Economic Time, 17th September 2018
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