|Wake up, smell the coffee|
|Thursday, 17 May 2012 16:51|
Greece will worsen and global flows will be volatile
Given the efforts to form a government in Greece aren’t making any headway and the odds of Greece leaving the eurozone have increased with the attendant risks of an increased debt crisis in Europe, it was obvious global markets would crash, as would the Sensex. While Asian shares fell 3%, the biggest one-day drop in six months, the Sensex fell 1.83%—this, though, is not the Sensex’s sharpest fall this year; it fell 2.16% on May 4. And the rupee fell to an all-time low of 54.50 to the dollar. While RBI officials have said they are watching the situation and will take necessary action—a separate window for oil companies’ dollar needs will lower forex reserves, but will dampen the demand for dollars—former RBI Governor C Rangarajan has said RBI should use its dollars to defend the rupee. The fact, however, is that since mid-December, RBI has sold $16-17bn to save the rupee, and has taken several other measures, but to no avail—against this, asking exporters to convert $2.3-3bn of their forex holdings into rupees is chump change. In other words, the chances of RBI being able to protect the rupee are low. While finance minister Pranab Mukherjee’s statement that India needed austerity measures can’t be objected to in principle, it’s difficult to see how they can happen, given the high share of subsidies, salaries and interest payments. In any case, while fixing the current account deficit is important, what’s needed right now are measures to increase forex inflows.
Apart from the fact that IIP is down to 2.8% for FY12 as compared to FY11’s 8.2% and corporate profits are down—for 1,066 firms, operating margins are down 252 basis points—the real issue is that investors are running scared. FII inflows were $4.2bn in December 2011, rose to $5.1bn in January and to $7.2bn in February, then there were outflows of $0.5bn in March and $0.9bn in April; till date, there have been inflows of $0.2bn in May—a falling rupee reinforces the falling Sensex to keep investors away. FDI flows for FY12 were higher than those for FY11 but there is a distinct softening from $5-6bn each month in May-June 2011 to around $2bn each month in January and February 2012. While the retrospective tax changes have hit the headlines, as FE reported Wednesday, a hyperactive taxman has ensured the amount of money locked up in just income tax disputes had doubled in the last one year, from R2,43,603 crore in December 2010 to R4,36,741 crore in December 2011! Working to make India a more investment-friendly destination, clearly, cannot be done by RBI but is up to the government. And, in a risk-averse situation, as now, even favourable government policy will take some time to attract investors—while commodity prices remain low in risk-off moments, forex flows also slow.