|Tuesday, 27 September 2011 00:00|
A 12% depreciation in just two months is, by all accounts, a significant event, but if market participants are to be believed, India Inc has only itself to blame for the mess it finds itself in today. Estimates are that anywhere between 40% and 50% of India Inc’s import needs are unhedged. A recent technical analysis by Kotak Economic Research says the rupee could potentially touch 52 if it breaches the 50.2 level in the very short run. Although Kotak does say this is based on just technical analysis, Crisil Research points to a 30% rise in the repayment of India’s short-term debt as an important factor, from $65bn in 2010-11 to $84bn in 2011-12—while trade credit needs are up from $47.5bn to $58.5bn, short-term bonds to be redeemed are up from $4.8bn to $6.5bn; long-term bonds that are maturing are up from $12.6 bn in 2010-11 to $19.1 bn in 2011-12. A rollover of trade credit, says Crisil, will be difficult, and getting fresh trade credit will also pose a challenge. How this plays out at the level of individual companies depends on a variety of factors and an Emkay Global Financial Services report says the impact varies between plus and minus 6% on overall FY12 earnings, although the impact could be as high as a 15% hit on Maruti’s earnings. There could be a balance sheet impact as well, and the market is wary of companies with high forex debt. A more immediate problem will be that of redemptions of foreign borrowings—in 2012-13, another Kotak report points out, a total of $24bn of ECB and FCCB come up for redemption.
All of which puts RBI in a tough spot since, apart from the immediate pressure on India Inc, a depreciating rupee puts pressure on inflation and negates all the beneficial impacts of a falling currency. Defending the rupee, however, is an impossible task, given the sheer volume of fund flows, perhaps why RBI’s statements have been cautious so far. With things getting tougher in global markets, and funds continuing to look for ‘safe havens’, India Inc could also have a problem sourcing funds from overseas. With corporate investment levels now down to around 12% of GDP, from a high of 17.3% in FY2008, it is clear that both India Inc as well as the government have their tasks cut out. As 13-14% of total borrowing of non-finance firms come from overseas, any turmoil in global markets will affect India Inc’s investments, typically 38-40% of India’s gross capital formation. Lower interest rates, once inflation comes under control, is an obvious response, but it seems unlikely investments will rise until some more serious policy reforms are made. So far, the signals don’t show the government is seriously working on this.