Depending on how you look at it, the ratio of India’s short-term debt to total debt has risen to 24.4% at the end of December 2012 or to an alarming 44.1%—the corresponding figures at the end of March 2011 were 21.2% and 42.2%. While the first set of figures relate to what is called ‘original maturity’, the second set refer to what is called ‘residual maturity’. Original maturity short term debt comprises trade credit of around $70 billion and FII debt in rupee-denominated bonds; to get the residual maturity numbers, you add ECBs of $21 billion and NRI deposits of $49 billion that need to be repaid before March 31, 2014. Though NRI deposits tend to be quite sticky, various projections of where the rupee will be six months from now are based on various scenarios of what happens to inflows versus the outflows, both planned and unplanned. In the latest data released by RBI for Q4, FY13, there was a $3.2 billion fall in suppliers’ credit on a sequential basis and an $8.7 billion fall in banking capital—the capital that flows from global banks to Indian ones. With US yields increasing in the wake of the markets’ view that QE3 will be gradually wound down, the last 15 trading sessions have seen a total of $5.5 billion of FII money flowing out of the country, or which $3.7 billion was from the debt market. Juxtapose this with flat exports in April and May and rising gold imports, and it’s obvious Q1FY14 CAD won’t be as comfortable as Q4’s 3.6% of GDP.
What follows immediately is dramatic worsening of major parameters. Once the rupee collapses, domestic inflation rises and, to cite just one instance, oil under-recoveries rise—this either worsens the fiscal deficit if the government takes on the burden or worsens the financial position of oil PSUs who then invest less. Just two months ago in May, diesel under-recoveries were just R3.73 per litre—but with the rupee collapsing from 54.78 to the dollar then to 60.13 today, under-recoveries are close to R10 per litre.
This is where various reforms being planned/executed come in. So far, despite the government talking of relaxing FDI caps and offering to nearly double gas prices to bring them closer to market prices, this hasn’t really impressed investors and the rupee has weakened from 57.53 to 60.13 to the dollar over the last 15 trading sessions. At a time when investors aren’t too impressed with India anyway, and are more focused on rising US bond yields, the impact of the Food Security Bill ordinance could be problematic. As compared to the government’s estimate that the Bill will cost R1.3 lakh crore in a full year, the CACP has estimated it will cost over R6.2 lakh crore over 3 years. A lot depends on how soon the Bill is rolled out and economic affairs secretary Arvind Mayaram insists the impact will be negligible, that the 4.8% fiscal deficit target for FY14 will be met. To be sure, the government has a lot of aces up its sleeve—just selling the SUUTI shares will fetch it R53,000 crore and divesting just 10% of the Coal India stake will meet a third of the year’s disinvestment target. Whether investors will see the aces or whether they will focus on the populism/stalemate on reforms will determine whether the rupee touches 65 in the near term.