Indian Markets Losing Currency among Investors

GAAR, POLICY PARALYSIS HIT LOCAL TRADING

India's economic growth plunging to a nine-year low in the quarter to March may have come as a big shock to many last week. Now, data relating to equities and currencies show the country's financial markets too are being exported as investors increasingly trade in Indian assets in overseas markets against the backdrop of retrospective taxation measures, policy paralysis and uncertainty. 

Since April this year, a little after Pranab Mukherjee unveiled his budget that proposed a raft of tax measures, including retrospectively taxing indirect transfers, trading volumes in American Depositary Receipts (ADRs), which represent stocks of some of India's top companies such as Infosys, HDFC Bank and Dr Reddy's Laboratories (DRL), have spurted and in some cases are higher than volumes of such stocks on Indian exchanges. Traded value of Infosys ADRs was as high as 154.93% of the total traded value of the stock in Indian markets at the end of May while it was 92% in the case of DRL, 88.43% for ICICI Bank and 85% for Tata Motors. 

Since mid-March through Mayend, open interest of Nifty futures traded in Singapore has increased 26% at 3,49,666 contracts while that of Nifty futures in the local market has fallen by a similar extent to 5,08,193. Open interest is the outstanding position of traders and indicates the amount of money flowing into a market. Nifty is India's premier stock market index while futures on the index facilitate its sale or purchase at a preset price on a future date. 

The higher interest in Nifty traded on Singapore's SGX has been at the cost of Indian markets, which have seen a flight of foreign investors ever since the General Anti-Avoidance Rules (GAAR) to tax indirect transfers of Indian assets overseas were introduced in this year's budget. 

A similar story is playing out on the currency trading front. 

Volumes in offshore, unregulated deals, known as non-deliverable forwards, or NDF, have also been on the rise.The Bank for International Settlements estimating the trade at 50% of the total offshore and onshore volumes. Policy Mistakes Blamed 

Rupee volumes too have surged on the Dubai Gold & Commodities Exchange (DGCX), whose share of overall exchange-traded futures, including NSE, MCX Stock Exchange, United Stock Exchange and Bahrain Financial Exchange, in dollar-rupee contracts has jumped three-folds to 16% from the year-ago level against a 5-8 percentage point jump in NSE and MCXSX volumes over the same period. Indian rules bar foreign investors and NRIs from trading in the local currency futures market, which, in turn, are betting on the rupee in overseas exchanges such as DGCX. The rise in NDF has also been fuelled by arbitrage opportunities between Indian offshore markets like Singapore, Hong Kong and London. 

Much of these are being traced to policy mistakes on the part of the government and financial sector regulators and an operating environment that is being perceived as hostile. Sanjay Nayar, who heads the Indian operations of global buyout firm KKR, says a proxy market is developing overseas. "We should stop externalising our assets and think hard about how much dependence we create on shortterm capital. What we need to do is encourage and develop our local markets, be it bonds, equities or currency, to tap into our latent savings potential instead of a policy bias in favour of avenues that encourage short-term flows from different pools of foreign capital," says Nayar. 

What has also not helped is higher total costs in the Indian market, which otherwise is recognised globally for its financial markets infrastructure. In good times as during the high growth phase of '04-'05 to '07-'08, overseas investors had chosen to ignore costs such as a high securities transaction tax, or STT, and stamp duty, but now these costs are being held against India. Singapore, which has mainly benefitted because of India's governance issues and an uncertain policy and regulatory environment, does not impose such taxes and attracts financial sector firms and investors by offering a lower cost of capital. In short, investors say it is cheaper to trade on the SGX rather than on a similar contract in the Indian markets. 

According to Uday Kotak, executive vice-chairman and managing director, Kotak Mahindra Bank, over the last three-four years, market volumes have not grown, with a lot of it shifting from the cash segment. Local mutual funds have also not grown much with a drop in investor interest. The current challenge is to ensure significant liquidity in the local markets and the participation of domestic savers in equities, he says. "Policy should focus on two key elements — liquidity and transaction costs," Kotak says, citing the case of South America, where in all the major markets there were more volumes in local stocks on the New York Stock Exchange than the local markets. That is something which any large market needs to protect, he says. "What we have ended up doing is boosting the Singapore economy at the cost of India," says the head of a top global financial services company who did not want to be named. "It is a case of the tail wagging the dog and there is little point in locking the doors after the damage has been done," said another professional in the financial sector. 

According to Ajay Shah, professor, National Institute of Public Finance and Policy, the root of these problems lies in the policy mistakes made by the government and regulators. He lists these as a lack of residence-based taxation, targeting tax revenues from non-residents through STT and the prospective attack on the Mauritius treaty through anti-tax avoidance rules such as GAAR, capital controls in the form of barring foreigners from trading currency futures on NSE, and margin requirements imposed by SEBI.

Economy gasps as growth sputters to 9-yr low of 5.3% 6.5% GDP Rate In 2011-12 Way Below Govt’s Estimates

New Delhi: India's economic growth has come down to a nine-year low of 5.3% in the January-March quarter of this year, showing up in bolder relief than ever before the signs of the severe stress in the economy, and prompting calls for urgent action to reverse the trend. 

    Data released by the Central Statistics Office (CSO) on Thursday showed growth in 2011-12 stood at 6.5%, much lower than the 8.4% posted in the previous year. It was below the government's previous estimate of 

6.9% and way off the mark of estimates handed out periodically by top government policymakers. 

    The Indian economy, once the star among emerging market economies, has steadily slowed since the January-March quarter of 2010-11, and on Thursday after digesting the January-March growth figure of 5.3%, some economists cut their growth estimates for 2012-13. 

    The manufacturing sector growth fell 0.3% in the March quarter compared to an expansion of 7.3% in the corresponding period the previous year. Agriculture posted a growth of 1.7%, sharply lower than the 7.5% growth in the March quarter of 2010-11 For the full year, the manufacturing sector grew 2.5% in 2011-12 compared with 7.6% in 2010-11. 

SLUGGISH ELEPHANT March quarter GDP growth at 5.3%, against 9.2% in Q4 of 2010-11 

Manufacturing scrapes the bottom with 0.3% decline, agriculture grows just 1.7%, services slow down to 7.9% from 10.6% 

Overall 2011-12 growth at 6.5%, lower than estimates of 6.9% Economists are scaling down growth projection 

for 2012-13 

Industry in gloom. Says govt should pull out all stops to stem the slide 

Growth in core sectors slows to 2.2% in April 

    Growth in the eight core industries slowed in April, pointing to a rut. Coal, crude oil, natural gas, refinery products, fertilizers, steel, cement and electricity grew 2.2% in April, lower than the 4.2% posted in the same month last year. P 19 

Govt in denial? FM hints that the worst is over 

    The finance ministry seemed to be in denial on Thursday, with officials saying India was still growing faster than many Eurozone countries. Pranab Mukherjee too suggested the worst was over, saying the factors for sluggishness had "bottomed out". P 19 Experts urge govt to step up reforms

New Delhi:The slide in the economic growth has led to calls for quick action on the part of the government. The sluggishness in the services sector, which accounts for nearly 60% of GDP, emerged as a worry for policymakers already burdened by the slowing economy and stubborn inflation. Data showed the services sector growth slowed to 7.9% in the March quarter compared with a10.6% expansion in the sameyear-ago period. The domestic demand-driven economy has been hit hard by high inflation, interest rates, rising global commodity prices, lack of economic reforms and delay in implementation of projects. This, in turn, has hit business confidence, forcing domestic players to explore investment options overseas. 

    Policymakers have consistently blamed the global economic environment and the lack of cooperation from the opposition in approving key economic legislations as reasons for the slowdown. The March quarter data came on a day when the opposition had called for a shutdown to protest the sharp increase in petrol prices. Analysts say the disappointing growth numbers could spoil the mood further and heighten the anxiety. 

    Finance Minister Pranab Mukherjee termed the March quarter data as disappointing but said the figures should be seen in the light of overall global developments. He attributed the slowdown to tight monetary policy and the weak global sentiment affected growth in domestic private investment. 

    But economists pointed to two key risks which included uncertainty about the monsoons and the European debt crisis and said the need of the hour was to step up reforms and ease supply bottlenecks.

COME AGAIN? 

There are several reasons that growth is almost universally predicted to be sustained at a high rate of 8-9% per annum and more, over the next few decades... —PRANAB MUKHERJEE ON AUG 6, 2011

Pain in Spain drags India Re to new low of 56.23

Currency Loses Over Re 1 In 2 Sessions Mumbai:The rupee breached the 56-level once again to end the day at 56.23 — its lowest close and near its all-time intraday low of 56.38 seen last week. The rupee weakened against the dollar which gained in the international market after trouble in Spain's banks pulled the euro down to atwo-year low.      "Intervention by the Reserve Bank of India prevented the rupee from sinking to a new low against the dollar. Although the domestic currency had come close to its previous low, which is seen as a resistance level, there was no major supply and import demand persisted," said a dealer with a private bank. The rupee, which closed at 55.68 on Tuesday, opened weaker and quickly slipped past the 56-mark to trade around 56.20. Dollar sales by the central bank helped pull back the currency to 56.14 levels, however, fresh bad news from Europe dragged the rupee down to close at its low of 56.23.      Following Wednesday's decline, the rupee has lost more than one rupee in the last two trading sessions and continues to be the worst performing Asian currency although the Indonesian Rupiah and the Malaysian Ringitt also weakened against the dollar.      This week saw some positive developments in Greece where surveys showed that elections may throw up a probailout party. owever, Spain is now turning out to be a bigger worry than Greece. On Wednesday, the Spanish government said that it would infuse 19 billion euros into distressed real estate lender Bankia SA whose troubles had led to a run on Spanish institutions. Also the Bank of Spain warned that the country may sink deeper into a recession. Dealers are worried about Spain because it is a much larger economy and may prove more difficult to bail out by the larger economies of northern Europe.      According to David Joy, chief market strategist, Ameriprise Financial, the present global situation reflects the triumph of fear over valuation. "In Brazil, the Bovespaindex is trading at 9.4x expected 2012 earnings. The S&P 500 is trading at 12.7x. In Europe, the Euro Stoxx 50 index is trading at a 8.9x P/E ratio. Each of these represents a meaningful discount to their long-term averages, but these are not average times. Three full years into the economic recovery, investors' first reaction remains to flee, not to fight," he said in a note.  BROKEN BY BANKIA  tIndian currency weakened due to the euro plunging to a two-year low on bank trouble in Spain, which is turning out to be a bigger worry than Greece  tSpanish govt will infuse 19bn euros into distressed Bankia  tDealers are worried as Spain is a much larger economy and difficult to bail out  tIn the domestic forex market, RBI intervened with dollar sales that prevented the rupee from sinking to another intra-day low tThe slide has ensured rupee's status as the worst  performing Asian currency

Falling rupee: a kick in the pants for Congress

Will the crash of the rupee to a record low of Rs 54.68 per dollar be a "kick in the pants", to quote economist Arvind Subramanian, that finally forces the government to slash unwarranted subsidies and deepen reforms? Hopefully yes. 

    But Rohini Malkani of Citibank says, after a US visit, that foreign investors view the government as structurally paralyzed. They expect GDP growth to slow to 6-7%, and the exchange rate to fall to Rs 60 per dollar. There is a silver lining. A relentlessly falling rupee and stock market may finally force the anti-reform crowd—including Sonia Gandhi—to swallow bitter medicine needed to cure the current economic malaise. 

    Many alarm bells are ringing. Consumer price inflation is up from 7.4% in January to 10.4% in April. The current account deficit is a record 4% of GDP. Both industrial production and exports shrank in March. The Eurozone crisis has caused billions to be pulled out of all emerging markets. India is especially vulnerable: its credit rating is already at the bottom of the investment-grade range. Any further downgrade will reduce it to junk status, accelerating the exit of foreign investors. 

    Manmohan Singh and Pranab Mukherjee know what's to be done. Commenting on the Budget, Singh said the fiscal deficit must be cut to curb inflation. Open-ended subsidies for petroleum products and urea, threaten to become thrice the entire outlay on NREGA, the government's flagship employment programme. 

    Ideally, the government should decontrol petrol and diesel, limit subsidized cooking gas connections, and replace the kerosene subsidy with free distribution of solar lamps. Urea should be moved to a fixed nutrient-based subsidy, like other fertilizers. And foreign direct investment in multi-brand retail-—cleared by the Cabinet but not yet notified —should officially be notified. 

    Politicians worry about double-digit inflation, which always spells electoral disaster. However, many Congressmen think inflation can be curbed by everrising subsidies. They cannot see how raising diesel or urea prices can curb inflation. 

    Answer: inflation is caused by excess demand in the economy, arising from insufficient production (bad investment climate, paralysis in clearances) and excessive spending (big fiscal deficits). Excess demand also sucks in excessive imports, hitting the balance of payments. 

    This cannot be checked by additional subsidies, for this additional spending itself creates additional excess demand. Note: inflation is low in countries with no oil subsidies, like the US. The solution lies in pruning excess demand at source — by reducing government spending. 

    The axe should fall on the least rational spending. It is surely irrational to spend thrice as much on oil subsidies as on NREGA. The resultant hole in government finances has fuelled a vicious cycle of high inflation, trade deficits and still higher fiscal deficits. 

    Realpolitik pundits rule out any controversial measure during or just before a session of Parliament, since the Opposition will protest violently and paralyze Parliament. Nor are any reforms possible before state elections, which are typically decided on swings of 1-2% of the vote. A reform hitting just 1-2% of voters can be electorally fatal, say these pundits 

    Well, Parliament goes into recess next week, and will not reconvene till July. No state election is due till the year-end. So, the coming weeks constitute a heaven-sent window of time for action. 

    Alas, some politicians oppose any action till the presidential election in July. This is daft. There are no populist vote banks to be wooed in a presidential election. Only elected legislators participate in the presidential election, so what matters is getting enough political parties behind your candidate. 

    Identity politics matters. If, for instance, the Congress party fields a Muslim like Vice President Hamid Ansari, it will be difficult for the Samajwadi Party, Trinamool Congress or Left Front (all of whom woo the Muslim vote) to oppose him. The BJP may propose a rival Muslim like Abdul Kalam. Regional parties have proposed Purno Sangma, a Christian. Whether legislators vote for Ansari, Kalam or Sangma will not depend on whether or diesel and urea prices are decontrolled. 

    Many opposition parties will, of course, castigate these measures. But June is a hot month when politicians go abroad or to hill stations, and political activity is at its lowest ebb. If the government acts forcefully within the next three weeks, opposition protests will be weak, and largely forgotten before the July presidential election. 

    Is this logic strong enough to sway Sonia? Maybe not. But if foreign confidence in India keeps ebbing, and the Greek election on June 17 leads to that country's exit from the Eurozone, the rupee will plummet further, maybe even to Rs 60 per dollar. That should concentrate Sonia's mind wonderfully.

Re dives to 56.01 on fears of Greek exit from euro

Mumbai: The rupee weakened beyond 56 per US dollar and closed at 56.01 as the euro fell to a 20-month low against the dollar on fears of a Greek exit from the common currency. Forex dealers said that the petrol price hike was a positive for the exchange rate and equity markets, but Thursday's opening would depend on how the global sentiment in respect of euro moves tonight. 

    The rupee was among the worst losers in Asia as traders felt that weak macroeconomic indicators made the rupee more vulnerable in a risk-off scenario. A 'risk-off ' scenario is a term used to describe an environment in which investors shun markets despite higher returns in favour of safe haven investments even if returns are negligible. 

    "Ideally, the petrol price hike should support the rupee as it shows a move away from the policy paralysis. This and more such bold moves would really help India to come out of a negative perception. However, given that there is a lot of risk aversion overseas, tomorrow's (Thursday's) movement will depend a lot on what happens in the international markets overnight," said Ashish Vaidya, head of fixed income currency and commodities at UBS. 

    The local currency, which opened at around 55.68, soon fell to the day's low of 56.22. However, the currency recovered to close at 56.01. 

    Quotes in the forward market indicate that the rupee could slip close to 58 in six months or beyond 59 in 12 months. 

    "While fundamental stresses persist at the core of rupee weakness, added uncertainties regarding Greece's future and Chinese growth have only exacerbated the situation," said Priyanka Kishore, forex strategist at Standard Chartered Bank. According to Kishore, technical charts show that the rupee could stop somewhere between 57.32-58.62, most likely around 58.54/58.62. 

UNENDING SLIDE 

tRe slipped to 56.22 intra-day as euro fell to 20-mth low against dollar on Greek exit fears 

tDomestic currency fared worst among Asian losers as traders felt weak macroeconomic indicators made the rupee more vulnerable 

tForward market quotes indicate rupee could slide to 58 in six months, or beyond 59 in a year

Inflation, rupee pull sensex down

Mumbai: A slew of factors — Moody's downgrades of leading banks, financial institutions and Reliance Industries, fears of Greece exiting Euro, higher-than expected inflation numbers and weakness of the rupee — weighed on Dalal Street on Monday to pull the sensex down by 77 points to 16,216, near its fourmonth closing low. To make matters worse, there was a technical glitch in NSE's derivatives trading software that also unnerved traders, and the market fell despite buying by foreign funds, brokers and dealers said. 

    On Monday, global ratings major Moody's downgraded LIC, Axis Bank, HDFC Bank, and ICICI Bank because of changes in its rating methodology, seemingly a technical downgrade. It also lowered its rating on Reliance Industries to 'credit negative' on concern of falling gas production. Index heavyweight RIL closed 2.3% lower at Rs 681, while HDFC Bank lost 2% to Rs 501, ICICI Bank was down 1.7% at Rs 799 and Axis Bank lost 0.7% at Rs 994. 

    The day's trading was also impacted by a higher-than-estimated reading of the Wholesale Price Index (WPI) at 7.23%, mainly due to sharp increases in the prices of primary articles. Market was expecting the WPI to come in at around 6.7%. The inflation data also spooked expectations that the RBI could cut rates in its next policy review meeting to boost the currently weakening growth. 

    The Street also felt the jitters from Europe where concerns about Greece existing the Euro monetary union escalated, which in turn pulled European markets down in the opening trades. 

    The weakness of the rupee, which closed at an alltime low of 53.96 to a dollar, also spooked market players. 

Greece triggers global stock selloff 

    Global stocks slid and the euro fell to a four-month low on Monday as a political impasse in Greece heralded a potential exit for the country from the Eurozone, while a move to prop up lending in China and poor European data pointed to slower world growth. Safe-haven currencies, including the dollar and the Japanese yen, rose and government debt gained as coalition talks in Greece on Sunday proved fruitless, increasing the chance of another election in mid-June. 

    European shares sank about 2% to their lowest levels in more than four months on the Greek crisis and signs a struggling Chinese economy. Stocks on Wall Street opened almost 1% lower. The Dow Jones industrial average was down 0.78%, at 12,720. The Standard & Poor's 500 Index was down 0.9%, at 1,341. The Nasdaq Composite Index was down 0.8%, at 2,909. 

    Oil fell to extend heavy losses as the mounting uncertainty over Greece and the prospect for slower growth in China weighed on the demand outlook. Brent crude was down by $1.84 to $110.42 a barrel. US crude fell $2.12 to $94.01 a barrel. AGENCIES

Re ends at record low of 53.96 vs $ RBI Intervention Fails To Halt Slide, Inflation Weighs On Pro-Growth Policy

Mumbai: The rupee plunged to close at a new low of 53.96 against the dollar despite intervention by RBI following high inflation numbers. Dealers are now waiting for the currency to test its all-time low of 54.3 seen in December 2011. 

    Dealers said that the currency weakened after high inflation numbers reduced the possibility of RBI coming out with a pro-growth policy. There was also a global demand for dollars after it became increasingly likely that Greece would drop out of the euro zone – a development which weakened the euro. 

    The rupee dropped to a low of 53.92 in intra-day trade, sharply lower from its Friday's close of 53.64, when RBI is believed to have intervened by selling dollars. Although RBI's dollar sales pulled the rupee to 53.82, the respite was temporary and the domestic currency slid to close at a low of 53.96. "We will probably see the all-time low of 54.3 levels being taken off on Tuesday and this could be the trigger for exporters to come in. It would take a very bearish exporter to expect the rupee to settle below its historic low," said Harihar Krishnamoorthy, treasurer, First Rand Bank. He added that there was unlikely to be any panic buying by importers as most would have booked their contracts earlier. 

    With the growth coming under threat, many dealers had been betting on a rate cut to improve sentiment. Monday's inflation data reduces chances of any immediate reduction in rates. "Even though downside risks to growth continue, inflationary pressures remain on the upside. A weak currency, suppressed inflation and fiscal slippages could be some of the factors restricting the RBI's ability in cutting policy rates even if demand side pressures subside," said Indranil Pan, chief economist , Kotak Mahindra Bank. Chances of a rate cut have also dimmed with bank deposits showing sluggish growth which is not even enough to keep up with credit demand. 

    According to Krishnamoorthy, the rupee is probably undervalued at its present level and if the central bank was able to bring in some stability, the currency could firm up. 

    "The Rs 12,000-crore bond buyback announced by RBI will give the central bank headroom to sell up to $2 billion in the foreign exchange market without drying up rupee liquidity," he said. 

CURRENCY CONUNDRUM 

Why did the rupee weaken? 

    High inflation numbers have weakened chances of a pro-growth monetary policy. This could hit investment flows. Second, there are high chances that Greece may exit the euro zone which has pushed up global demand for dollars. Third, there has been a meltdown in asset prices, including crude, gold and platinum which could have increased import demand. 

Where will it settle down? 

    Dealers say that the rupee is probably undervalued at present levels. One simplistic measure of valuation is the Big Mac Index according to which a McDonald's burger is the cheapest in India. With RBI support there is likelihood that traders may start selling dollars once it touches the new peak 

Why should RBI support the rupee? 

    Inflation — already high — will shoot up if the rupee continues to weaken. A volatile rupee would also dissuade foreign investors on fears of their investments losing value 

Who gains by the weak rupee? 

    Exporters, manufacturers of import substitutes, nonresident Indians stand to gain. Whereas those planning foreign trips, students and anyone buying imported goods will have to shell out more rupees 

INDIAN CFOS' TAKE ON GROWTH PROSPECTS 

t45% view exchange rate (Re) instability as biggest threat 

t66% to make changes to risk management and hedging practices 

tThree fourth set aggressive growth targets in 2012 with 91% confident of meeting their growth targets 

t60 % say their growth prospects will depend on domestic sales than on exports 

t47% not inclined to tap their cash reserves over the next year 

t63% expect to increase spending on travel to meet customers 

t86% feel optimistic about economic expansion 

t57% planning to add jobs Source: American Express/CFO Research Survey