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India Public Affairs Round-up - Issue 2

India Public Affairs Round-up - Issue 2

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Published by MSLGROUP
The Indian rupee’s recent roller-coaster ride has impacted virtually every section of society. It has hit the country’s finances, eroded investor confidence, pushed down stock indices, pumped up fuel prices and, in turn, those of essentials.
The rupee’s slide is symptomatic of the concerns about the India story. Months of policy paralysis, political churn and social standoffs have taken their toll. It is in this backdrop that senior journalist Subhomoy Bhattacharjee analyses the prospects of the rupee in the cover story of the August edition of PAR, MSLGROUP India’s public affairs newsletter.
Another senior journalist, Kandula Subramaniam, puts into perspective the power crisis the country is up against and the dilemma state electricity companies are facing.
Additionally, you'll also find an analysis of India's bold food security law as well as an update of important policy announcements and reviews in this issue.
The Indian rupee’s recent roller-coaster ride has impacted virtually every section of society. It has hit the country’s finances, eroded investor confidence, pushed down stock indices, pumped up fuel prices and, in turn, those of essentials.
The rupee’s slide is symptomatic of the concerns about the India story. Months of policy paralysis, political churn and social standoffs have taken their toll. It is in this backdrop that senior journalist Subhomoy Bhattacharjee analyses the prospects of the rupee in the cover story of the August edition of PAR, MSLGROUP India’s public affairs newsletter.
Another senior journalist, Kandula Subramaniam, puts into perspective the power crisis the country is up against and the dilemma state electricity companies are facing.
Additionally, you'll also find an analysis of India's bold food security law as well as an update of important policy announcements and reviews in this issue.

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Categories:Types, Business/Law
Published by: MSLGROUP on Aug 16, 2013
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02/05/2014

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Public Affairs Round-up
MSLGROUP INDIA
August 2013 | Vol 1 | Issue 2
 
2
Will the rupee end the year above60 to the dollar?
headed and how ast. The markets too have an estimate. Thisis reected in the one-month utures in the currency markets,all o which were trading above 60 at the time o writing.I the RBI too is comortable with that and ocuses instead onthe volatility in the markets, then it is unlikely to do too much.Selling dollars to cut down intra-day swing is what it wouldaim at.
Does it have the reserves to do so? At $280billion, the bank is running a cover o less thanseven months or imports, so the maximumit could deploy at any stage is less than $30billion. Among BRIC countries, this is thesmallest. Brazil and Russia, or instance, have19 months’ cover (BoA estimates).
 
A week earlier, again a Monday, it cut room or banks to carryout proprietary trading in the currency utures, exchange-traded currency or options markets. This means it has crimpedthe size o the rupee derivatives market temporarily.The options now include:a) More o the same, ie, raising rates urther and/orsqueezing market volumesb) Making it mandatory or exporters and those raisingoreign debt to bring their oreign currencies back homec) Egging on banks to oer higher interest rates on non-resident oreign exchange denominated accountsd) Raising o orex borrowing on government or public sectorbank accountsTo take a call on any or all o these, the RBI will obviouslybe guided by an underlying estimate o where the rupee is
The options or the Reserve Bank o India (RBI) and the fnance ministry havedropped o considerably since June 19 when US Fed chie Ben Bernanke signalledthat the quantitative easing policy could begin to ease o. The RBI on July 15 movedtwo key interest rates — the marginal standing acility and the bank rate to 300 basispoints above the repo rates to make the rupee costlier to punt on.
Subhomoy Bhattacharjee, deputy editor, The Indian Express
 
3
To cut down short-term volatility, however, that would sufce.This allied with options a) and b) would be the RBI’s arsenal.Options c) and especially d) could, however, becomenecessary i the fscal conditions – namely the balance opayments – worsen. India ran a current account defcit o 4.8%in FY13 and estimates or FY14 are 4.3% to 4.5 %. This meansan uncovered liability o $83 billion to fll up through portolioand direct investment, besides remittances. Worries on Indianot pushing growth enough to earn the money to fnance thisgap has piled on top o money seeping out rom emergingmarket economies to pull the rupee down.Raising interest rates is expected to make debt ows strongeras the dierential with rates obtaining in developed marketswidens. But the higher rates could make equity ows weaker.Lower interest rates mostly signal an economy with bettergrowth possibilities and, so, robust equity markets.The options or sovereign bond are unlikely to be usedimmediately as it will be rated and this will set a ceiling orsub-national entities. A public sector bank-led eort to mopup some unds rom abroad is the more likely alternative, i at all.
Trends in Indian monetary management
 
The current tensions in the rupee market have emergedprincipally rom the rising share o oreign trade in India’sGDP. It is more than 40% o the GDP o $1.8 trillion.The Indian banking system has been slow to adapt to therequirement o this market, principally the need to hedgecurrency bets. The RBI has run a generally closed marketthat ocused only on providing trade credits and discountingo bills o exchange. It had not actored in the need or acurrency hedge.So, in 2000, the onshore currency market with only theUSD-INR and Euro-INR pair available did business o just$2.7 billion. As trade diversifed, importers and exportersconsequently moved abroad to fnd ways to cover their risks.The non-deliverable orwards (NDF) market in the rupeesprang up where the underlying was the quote or the rupeein the NSE, but the trades were squared o in US dollars. Themarket developed in Singapore and then Dubai too joinedthe party.Also, in 2007, the government imposed a securitiestransaction tax on the local market that pushed volumesabroad by the shovel-load. By the time the domestic banksmoved in to take positions in the currency, the action hadshited abroad. In June 2013, or instance, the total size othe daily onshore currency market was about $40 billion.But Singapore itsel does business o close to $25 billionin the rupee NDF market.The 24-hour currency trading cycle is putting pressure onmanaging the rupee by the RBI. Intererence in the exchangerates runs the risk o importing ination and worsening thefscal defcit.The RBI has in the past tried options, including setting upquasi-sovereign banking bases abroad, to guide movementsin NDF but those have not delivered.This brings us back to the connection between the rupee andthe behaviour o the economy.There are two lines o argument or the RBI to grapple with.A all in the value o the rupee, some are convinced, will help.A weaker rupee will help services sectors like IT. An earlyindication o this was Inosys’ results. It released earnings inline with orecasts, the frst time ater several quarters, buoyedby a 9% dip in the rupee since June 2013. All such frms earnin orex and pay in rupees.In the manuacturing sector, too, the rupee can help. Acheaper currency means Indian goods will be cheaper abroad.This is signifcant as India has aced competition rom Chinain this sector due to the labour cost advantage that the latterenjoys. A sustained dip in the rupee o this magnitude canbe a game-changer or Indian actories. I entrepreneurs areconvinced that the rupee will stay thereabouts with the costadvantage vis-a-vis other Asian economies, it can change theace o Indian manuacturing and create jobs. But the key hereis to ensure that capital-labour productivity should not dip o.For the government, this helps instead o oering costly taxset-os to myriad sectors. Budget FY14 projects total directtax revenue oregone on this head as Rs 1,13,471 crore orabout 9% o total tax receipts.But on the way there are short-term pains. The elections aregetting closer and these pains can be expensive.

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