The Napoleonic quote about preferring lucky generals to good ones doesn’t do justice to the great start RBI Governor Raghuram Rajan got off to, but not too many Governors can boast of a 248 paise appreciation of the rupee, 304 paise in the offshore non-deliverable forwards market, 1035 points in the Sensex and a turnaround in the FII market with $581 million coming in on Wednesday and Thursday. All this, without making the obligatory cut in interest rates, the only thing that seems to excite marketmen these days. A large part of this, of course, has to do with Rajan’s policy of allowing banks currency swaps while under-writing part of their hedging costs—with banks now able to effectively borrow money at 8.5-9% in rupees, estimates are this could see $10 billion come in from NRI markets. An additional window of $30 billion for banks to borrow as Tier-1 capital has also been facilitated by offering to underwrite 100 bps of hedging costs. If the thought of the government speeding up its act on attracting forex wasn’t enough to excite the market, at the G-20 summit, the government announced a more than trebling of the currency swap line with Japan, from the current $15 billion to $50 billion—the exact details of the conditions under which the swap can be undertaken and the rate have yet to be worked out, but given the previous agreement and the Japanese investment interest in India, they are unlikely to be onerous.
It would, however, be premature to think the India-sentiment has turned, more so since the details of the US taper will be available only next fortnight—poor US jobs data and sharp downward revision of previous months’ data suggests it will be put off a bit, and President Obama’s G-20 speech reaffirmed the taper would be, as the term suggests, tapered. While that will likely cheer markets later today, a lot depends on what other measures the government takes, and how investors view the balance between the possible positives and the outright negatives, the food Bill and the land acquisition Bill being the most egregious of the negatives. While the Cabinet Committee on Investments (CCI) has made definite progress and the way has finally been cleared for multi-brand retail FDI as well as Mylan’s $1.8bn takeover of Strides Arcolab’s Agila injectables unit, each of these good moves has been matched by bad ones. In the case of oil, for instance, Cairn India has been asking for faster clearances in order to boost production by 1 lakh barrels a day (that’s around $4bn in terms of value each year), but this has yet to happen. In the case of RIL, perhaps India’s most successful exploration company in recent years, notwithstanding the relative fiasco in the D1/D3/MA fields in the KGD6 block, the oil ministry has arbitrarily shut the company out of its NEC fields; and though the matter is in arbitration, the ministry has revived a proposal to force RIL to make good its gas ‘shortfall’ at the existing price before it gets the higher Rangarajan price for future gas supplies. Given this background, if the expected diesel price hike is not substantial, and matched with hikes in LPG and kerosene prices, chances are investors will turn bearish quickly enough.