India’s largest share market slide in nearly 2 years, surging binds yields and unprecedented plunge in the rupee are pressuring officials for fresh steps to stem capital outflows and revive a struggling economy. Standard & Poor’s 500 BSE Sensex Index sank 0.8% in Mumbai, extending 4% loss on 16th August, whereas rupee touched an all-time low of 62.46 per dollar. The market rout underscores the failure of months of measures to contain outflows from higher interest rates to gold import curbs. Foreigners marketed a net $3 billion of Indian bonds and shares last month as the slowest growth in a decade made Asia’s 3rd biggest economy vulnerable to a pullout of funds from emerging markets, spurred by speculation the Fed will cool stimulus.
Ms. Priyanka Kishore, Strategist at Standard Chartered PLC, London said the market is questioning the effectiveness of policy makers’ moves and options offered to them. Earlier, the govt. said it had a grand plan. This is what the market expected, however the final measures disappointed. The currency has weakened around 26% versus the dollar in the last two years.
Policy Concern
Manmohan Singh, Prime Minister said India won’t face a repeat of that condition as it has enough reserves for around 7 months of imports, compared with two weeks back then. Robert Wandesforde, Economist at Credit Suisse Group AG, Singapore said our main concern is that policy authorities still don’t get it – thinking this is fairly a minor squall that will simmer down relatively quickly with fairly minor actions. The current account gap widened to 4.8% of gross domestic product in 12 months ended March. RBI (Reserve Bank of India) estimates the sustainable level is 2.5% of GDP. Prasanna Ananthasubramanian, Economist at ICICI Securities Primary Dealership Limited, Mumbai said high CAD (current account deficit), high fiscal deficit, high inflation and slow growth all point to the inescapable conclusion that India’s problems are structural and deep.
Staunch Outflows
While other developing countries are also striving to staunch outflows, the 12% fall of rupee in the last 3 months is the worst after 15% decline in Brazil’s real in the basket of 24 emerging markets tracked by Bloomberg. Since mid-July, RBI (Reserve Bank of India) has raised bank rates and marginal standing facility, tightened lenders’ daily reserve needs and capped cash injections into the banking system to curb the supply of rupees, seeking to shore up currency’s value. Government also raised taxes on gold imports to try and narrow trade imbalance. It plans to enable some state firms to issue quasi-sovereign bonds for garnering inflows to help finance current account gap.
The monetary authority targeted outflows on 14th August, cutting the amount Indian firms can invest overseas without approval to 100% of their net worth from 400%.
Funding Risk
Palaniappan Chidambaram, Finance Minister said curbs on silver and gold imports and plans for compressing inward shipments of non-essential items will trim the current account gap to $70 billion or 3.7% of GDP this fiscal year. Chetan Ahya, Economist at Morgan Stanley in Hong Kong said India will remain exposed to funding risks, if consumer price inflation stays above 7% and current account deficit exceeds 2.5% of GDP. International funds have cut holdings of rupee debt by around $10 billion since 22nd May, when Ben Bernanke, Chairman at United States Federal Reserve said $85 billion a month of debt purchases could be reduced if American jobs market continues to enhance.
The economy of India might expand 5.5% in the year through 2014, compared with 5% in the last 12-month period. That lags behind the 10-year average of around 8% in addition to the performance of neighbors from Indonesia to Philippines.
Repair Image
Singh said in a speech on 15th August marking Independence Day of India that slow growth won’t last long. Work on rail projects, industrial corridors, airports and ports will begin in coming months. The premier is seeking to repair the image of his government and ruling Congress Party before elections due by May. Graft scandals, clashes with coalition partners and the risk of credit-rating downgrade have hurt his administration. Etihad Airways PJSC agreed in April to purchase 24% share in Mumbai-based Jet Airways India Limited for $334 million (Rs. 20.6 billion), taking benefit of the changes. AirAsia BHD won approval to form a venture with Mumbai-based Tata Group to set up local low-fare airline.
Rupa Rege Nitsure, Economist at BOB (Bank of Baroda), Mumbai said the figures underscore India’s need to address structural issues like governance, policy uncertainty and infrastructure bottlenecks.
India Stock Market,Share market India,Stock Market 