Guarding against a liquidity outflow important
Though global markets reacted negatively to the January minutes of the Federal Open Market Committee (FOMC) meeting that were released Thursday—some members indicated they wanted the US Fed to ease back on its assets purchase programme—the fears seem exaggerated. For one, easing back on asset purchases was always part of the Fed’s stated policy once it looked clear the US economy was back on track. There is nothing in the minutes to suggest any new conditions have been put in place, indeed some analysts have said the January FOMC minutes appear a bit more dovish than the December meeting minutes. Indeed, while global risks look a little less pronounced at the moment, and the US looks stronger than it has for a long time, reaching the Fed GDP forecast for the year looks a bit of a stretch. In which case, the chances of any significant easing in Fed policy for the rest of the year look low. Perhaps why the discussion in the FOMC meeting didn’t contain any reference to the Committee’s view of the date by which time the Fed should stop purchases of assets.
But if the US economy does recover faster than expected, liquidity will ease and there can be little doubt that, in the initial phase at least, funds flows to emerging markets like India will take a hit. Given how India’s current account deficit is so fragile, and is so vulnerable to global risk-on and risk-off moments, this puts an extra burden on India’s economy managers. Take the rupee, to begin with. Despite $24.4 billion of FII money flowing in during FY12, the rupee still fell from 51.3 to the dollar on January 1, 2012, to 54.6 on January 1, 2013. While the rupee has retraced a bit to 54.2 on February 12, keep in mind this is after $9.3 billion of inflows so far in the calendar year—around 38% of what came in during 2012 has already come in during less than two months of 2013. In the case of India Inc, similarly, there has been a sharp rise in exposure to ECBs—from around $41 billion at the end of FY07, this was up to around $104 billion at the end of FY12. In the case of companies like Bharat Petroleum, forex debt as a proportion of total debt rose from 18% to 88%—it rose from 15% to 68% for Hindustan Petroleum and from 22% to 42% for Indian Oil in the same period. In other words, while global liquidity doesn’t look like its going to choke off in a hurry, India would do well to keep in mind the implications of what could happen when it does.