Rs at 63.2 despite $17.5bn of swaps, wait for oil impact
With bond yields shooting up and the rupee breaching levels last seen in mid-September, the currency is in for a fresh round of turbulence—and with it, oil subsidies and, to the extent of unhedged positions, India Inc’s balance sheet will also take a hit. Though exports have risen by double digits for the fourth straight month and imports remain flat thanks to gold remaining well under control—at $24 billion, April to October gold imports were 13% lower than in the same period of FY13—the rupee has continued to weaken. Some part has been due to the dollar strengthening, but there have been other factors at work. In the last one week, the rupee has depreciated by 2.7% to the dollar as compared to 1.7% for the Russian rouble, 0.39% for the Korean won, 0.95% for the Thai baht, 2% for the Indonesian rupiah and the Turkish lira—the Brazilian real, though, fell 3.18% and the South African rand 2.81%. The rupee’s collapse, interestingly, is in the backdrop of FII flows turning around—the outflows of $3.1 billion in July and $2.3 billion in August turned into a $733 million inflow in September and $940 million in October before moving back to an outflow of $179 million in the first week of November. What is more important—FDI flows have been flat—is the response to the FCNR and banking capital swaps, with $17.5 billion coming in since September when the schemes were announced. Equally significantly, based on annual imports by oil PSUs, around $33 billion has also been kept out of the daily forex market since August 28 when a separate window was opened up at RBI for these PSUs.
Which is why, over the past few days, roughly the time since part of the oil PSU demand has been reintroduced into the market, the rupee has weakened. Chances are, as the oil demand gets fully re-introduced, this will worsen; more so since, by the end of the month, the FCNR window also gets closed. In which case, RBI has to use this window to quickly bring in the oil demand and hope that, with increased swap flows, the pressure on the rupee will be mitigated. The government also needs to take a call on joining global bond indices like the JP Morgan one. Given that $250 billion of global bond funds are based on the JP Morgan Emerging Markets Index, this means India can look at $25 billion of fresh funds coming into G-Secs—there could be more as funds that do not follow the fund also tend to take their cues from it. If this decision isn’t taken, prepare for a rough ride as RBI starts its reverse taper of bringing oil demand back into the forex market.