How Has India Built Large Forex Reserves Despite Perennial Trade Deficits?
India's forex reserves of nearly $640 billion are the 4th largest in the world despite the fact that it runs trade deficits year after year. Other nations among the top 5 with the biggest US dollar reserves are China ($3.4 trillion), Japan ($1.4 trillion) , Switzerland ($1.1 trillion) and Russia ($623 billion). They have all accomplished this feat by running large trade surpluses for many years.
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| History of India's Trade Deficits in billions of US dollars. Source: Trading Economics |
So how did India manage to build over $600 billion in US dollar reserves? The top contributor to India's reserves is debt which accounts for 48%. Portfolio equity investments are known as “hot” money or speculative money flows accounted for 23% of India's forex reserves, according to an analysis published by The Hindu BusinessLine.
While India has accumulated the largest forex reserves in its history, its debt to GDP ratio is also nearing an all-time record of 90%, the highest in the South Asia region. India's debt has risen by 17% of its GDP in the last two years, the most of any emerging economy. By contrast, Pakistan's debt to GDP ratio has increased by a mere 1.6% to 87.2% from 2019 to 2020.
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| India's Rising Debt. Source: Business Standard |
The International Monetary Fund (IMF) has projected the Indian government debt, including that of the center and the states, to rise to a record 90.6% of gross domestic product (GDP) during 2021-22 against 89.6% in the previous year. By contrast, the percentage of Pakistan's public debt to Gross Domestic Product (GDP) including debt from the International Monetary Fund, and external and domestic debt has fallen from 87.6% in Fiscal Year (FY) 2019-20 to 83.5% in FY 2020-21.
While large reserves are a source of comfort in terms of balance of payments and currency stability, it also has significant downsides. The biggest risk is the interest rates on the debt (accounting for 48% of India's US$ reserves) which depend heavily on the US Federal Reserve's monetary policy. Should the Fed decide to raise interest rates to tighten money supply amid inflation concerns, the cost of servicing the US dollar denominated debt will rise.
The second big worry is that the "hot money" accounting for 23% of India's US$ reserves could suddenly decide to leave India for better returns elsewhere. This happened in the Asian Financial Crisis of 1997-98. It began in Thailand and then quickly spread to neighboring economies. Initially, it was a currency crisis when Bangkok unpegged the Thai baht from the U.S. dollar that set off a series of currency devaluations and massive flights of capital.
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Triggering concern among macroeconomics experts, India's trade deficit was calculated at $23.27 billion for the month of November. This is the highest India's trade deficit has ever reached. The value of imports has remained above $50 billion for three consecutive months now. Going by the current trend, India's trade deficit for the third quarter will hit $65 billion.
As per official data, the imports have gone up by 57 percent (year-on-year) to $53.15 billion. The value of imports has remained above $50 billion for three consecutive months now. The average value of imports used to be in the $40 billion range.
Why the widening trade gap?
The trade deficit of a country increases when the value of its exports fall below the value of its imports. India’s trade deficit has been increasing on the back of its increasingly higher imports, while exports have been lower than expected as well. Imports have increased by 57 percent, year-over-year.
The value of imports has been increasing not due to increased volumes but increased commodity prices, mainly fuel. India, as a net importer of fuel, has been hit hard by the high prices of crude and coal as nations have been struggling to keep abreast of the power crises across the world.
The increase of 132 percent in crude prices has hit Indian imports hard. The rise in prices of other commodities like chemicals, gold, electronics and machinery has also drastically increased India’s import ledger.
At the same time, the tally of exports has also been the lowest since February 2021, even though petroleum products, engineering goods, chemicals and others have performed well.
Why is it bad?
The concerns are well-placed as this is the third consecutive month when India's trade deficit -- the difference between the value of imports and that of exports -- was upwards of $20 billion. A higher trade deficit may weaken the Indian rupee against the dollar.
While a trade deficit is not inherently bad or good, it can have different effects, depending on the economy in context. In India’s context, the simplest cost will be increasingly higher costs of imported goods for consumers while domestic workers also earn less due to a weakened rupee. Depreciation of the rupee can be welcome in the global economic context, but not over the longer term.
Also read: Will RBI use ‘clutch’ and ‘accelerator’ in its upcoming monetary policy?
Continuing trade deficits also eat into the country’s balance of payments (BoP). India’s balance of payments surplus stood at $80 billion.
What lies ahead
Going by the current trend, India's trade deficit for the third quarter will hit the $65-billion mark. Meanwhile, India's exports fell below $30 billion in November. The last time this happened was in February this year. However,oil exports of petroleum products, chemicals, cotton textiles, and electronics have gone up.
https://twitter.com/haqsmusings/status/1469375632639287302?s=20
The Indian rupee closed at a nearly 18-month low on Thursday, a day after the Reserve Bank of India (RBI) maintained a status quo on policy rates but tightened excess liquidity from the banking system.
The partially convertible currency closed at 75.52 a dollar, the lowest since July 1, 2020, when it had touched 75.59. The rupee had closed at 75.45 a dollar on Wednesday, the policy day.
According to currency experts, pressure on the rupee would continue; some even said the domestic currency may cross its record low levels as the US Federal Reserve withdraws its easy money policy and move towards tightening of rates.
The rupee touched 76.92 a dollar in the intraday trade on April 22 last year.
“Within six to seven months, the rupee can be expected to move towards 78-plus level as the Fed becomes hawkish to rein in inflation, triggering strengthening of the dollar," said Samir Lodha, managing director of QuantArt.
“The record trade deficit will be an additional sore point for the rupee, while the RBI will ensure there's no currency crisis,” Lodha said.
The dollar index, which measures the dollar’s strength against major currencies, continued to strengthen and rose 0.18 per cent to 96.067.
On an intraday basis, the rupee fell 0.086 per cent even as many Asian peers rose against the dollar. Year to date, the rupee has fallen 3.244 per cent against the dollar. In a recent report, economic research firm QuantEco said that the rupee is likely to lose as it had outperformed its trading partners in the recent past.
The relative outperformance of the rupee in the recent past against other currencies in the region could “increase its overvaluation on a real effective exchange rate (REER) basis to 9.4-9.9 per cent in Nov-21, the strongest level in nearly 4-years,” QuantEco wrote in a report.
“Seen from a historical context, the current negative correlation between the dollar index and USDINR is getting ripe for a reversal. This holds from a REER perspective as well, where historical reversals in overvaluation have got triggered in the 8-12 per cent range,” QuantEco said.
Foreign investors have been net sellers of Indian equities in all trading sessions since November 18, withdrawing almost $5 billion during this period, said Sriram Iyer, senior research analyst at Reliance Securities.
Oil prices have risen for the sixth straight day as the Omicron mutation failed to suppress demand.
“Technically, the USDINR Spot pair immediate hurdle now is at 75.67 levels and a break above will push the pair to 75.83 and ultimately to 76.00 levels," Iyer said, adding, supports are at 75.30 and 75.22 levels.
https://twitter.com/haqsmusings/status/1469424437766209537?s=20
Highest Debt Among Peers Keeps India Outlook Negative at Fitch
By Rahul Satija +Sign Up
November 16, 2021, 5:24 PM PST
India’s government debt to GDP ratio was 89.6% in last FY
Higher debt levels may crowd out financing for private sector
https://www.bloomberg.com/news/articles/2021-11-17/highest-debt-among-peers-keeps-india-outlook-negative-at-fitch
Fitch Ratings retained its negative outlook on India’s sovereign rating that’s barely above junk grade, reflecting concern the country will find it challenging to cut its high public debt.
That’s in contrast with Moody’s Investors Service and S&P Global Ratings, which both have a stable outlook on India’s sovereign score. Fitch highlighted that the country’s general government debt at 89.6% of gross domestic product in the financial year ended March 31 is the highest of similar rated emerging-market sovereigns, in a note published late Tuesday.
Islamabad, Nov 24 (EFE).- International credit rating agency Fitch has affirmed that Pakistan’s policy adjustments and access to external financing could create positive momentum for the debt of the country.
The agency had predicted a “stable outlook” in May 2021 for Pakistan’s debt.
“Ongoing reforms, if sustained, could create positive momentum for the sovereign’s ‘B-’ rating,” Fitch said in a report.
It noted that Saudi Arabian had supported Pakistan’s near-term financing efforts to place $3 billion on deposit with the State Bank of Pakistan.
The kingdom would provide an additional $1.2 billion oil-financing facility under a one-year support package.
Pakistan’s foreign reserves also received a $2.8 billion boost in August from the IMF’s one-off global allocation of Special Drawing Rights.
On Nov.21, the IMF and Pakistan reached a consensus on the $6 billion financial assistance agreement of 2019. Fitch expects the fund to release $1 billion from the pact.
It is the third financial program that the IMF grants to the Asian nation.
“If the government retains its commitment to a market-driven exchange rate, we believe this would be a useful shock absorber to help contain external risks in the longer term,” it said.
An exchange rate that supports the price competitiveness of Pakistan’s exports could over time help to reduce the country’s reliance on debt financing to balance its external accounts, which remains a credit weakness.
In addition, fiscal consolidation under the EFF could help reduce external imbalances by dampening imports, while also reducing the drag of weak public finances on Pakistan’s rating.
The situation is a repetition of the previous elections of 2013, when two months after the inauguration of the new government the IMF announced a package of aid of $5.3 billion to reactivate its weakened economy.
Pakistan finished repaying that aid package in October last year, the first time that the country had fully repaid an IMF loan. EFE
Rupee may fall to 76.50 by end-March: Bloomberg survey
Rupee declines 1.9% this quarter, worst in emerging Asia
The Indian rupee is set to end a tumultuous year as Asia’s worst-performing emerging market currency with foreign funds fleeing the nation’s stocks.
The currency declined 1.9% this quarter as global funds pulled $4.2 billion of capital out of the country’s stock market, the most among regional markets where data is available.
PM Imran has sworn to raise exports to 57 billion USD by 2025!
https://www.brecorder.com/news/40142438
I hope Imran Saab can deliver on this.
Recording a fall of $160 million, the nation’s forex reserves declined to $635.667 billion during the week to December 17, according to data from the RBI.
For the previous week ended December 10, the foreign exchange — or forex — reserves had fallen by $77 million to $635.828 billion. The forex kitty had reached an all-time high of $642.453 billion during the week ended September 3, 2021.
For the reporting week ended December 17, the decline was mainly due to a fall in foreign currency assets (FCAs), a vital component of the overall reserves. This is the fourth straight week of fall in the reserves.
FCAs tumbled by $645 million to $572.216 billion, weekly data released by the Reserve Bank of India (RBI) showed on Friday.
Expressed in dollar terms, the FCA include the effect of appreciation or depreciation of non-US units such as the euro, pound sterling and Japanese yen held in the foreign exchange reserves.
Gold reserves rose by $475 million to $39.183 billion in the reporting week.
The special drawing rights (SDRs) with the International Monetary Fund (IMF) remained unchanged at $19.089 billion.
The country’s reserve position with the IMF increased by $9 million to $5.179 billion in the reporting week, as per the data.
Falling forex reserves may cause issues for the government and the Reserve Bank in managing the nation’s external and internal financial issues.
Higher reserves are a big cushion in the event of any crisis on the economic front and enough to cover the import bill of the country for a year. They also strengthen the rupee against the US dollar.
An increase in reserves also provide a level of confidence to markets that a nation can meet its external obligations, demonstrate the backing of domestic currency by external assets, assist the government in meeting its forex needs and external debt obligations, and maintain a reserve for national disasters or emergencies.
The Reserve Bank functions as the custodian and manager of forex reserves, and operates within the overall policy framework agreed upon with the government. It allocates the dollars for specific purposes.
For example, under the Liberalised Remittances Scheme, individuals are allowed to remit up to $250,000 every year. The RBI uses its forex kitty for the orderly movement of the rupee. It sells the dollar when the rupee weakens and buys the dollar when the rupee strengthens. WITH PTI
https://www.bloomberg.com/news/articles/2021-12-31/india-s-current-account-slips-back-to-deficit-on-wider-trade-gap
India’s current-account balance slipped back into a deficit last quarter as the nation’s trade gap widened.
The current account, the broadest measure of the country’s overseas trade and services flows, was in a deficit of $9.6 billion, or 1.3% of gross domestic product, in the three months ended September, the Reserve Bank of India said in a statement on Friday. The median in a Bloomberg survey of 12 economists was for a deficit of $10.9 billion.
The account was in a surplus of $6.6 billion in the April to June period, and also a surplus of $15.3 billion, or 2.4% of GDP, in the comparable year-ago period.
Digging Deeper
The latest numbers come on the back of a surge in global crude oil prices which inflated India’s import bill; the RBI cited widening of trade deficit to $44.4 billion from $30.7 billion in the preceding quarter and an increase in net outgo of investment income for the current-account gap
Income from services decreased sequentially, but increased on a year-on-year basis on robust performance of computer and business services, the central bank added
Friday’s data, which covers a period when economic activity in India was picking up after a second wave of Covid-19 infections, saw private transfer receipts, mainly representing remittances by Indians employed overseas, rise 3.7% from a year ago to $21.1 billion
Net foreign portfolio investment was $3.9 billion as compared with $7 billion a year ago; net foreign direct investment inflows amounted to $9.5 billion, lower than $24.4 billion a year ago
India’s benchmark bond yields surged to the highest in two and a half years after the government unveiled plans to issue record amount of bonds in the next financial year.
The selloff was exacerbated as the annual budget announcement lacked widely expected measures to facilitate inclusion of the nation’s debt into global bond indexes. Elevated bond sales will worsen debt supply worries in a year when the Reserve Bank of India is expected to wind back on its monetary stimulus.
“India government bonds are facing a double whammy,” said Harish Agarwal a bond trader at FirstRand Bank in Mumbai. “Without any support, the yields are set to jump to 6.95% to 7% in the coming days.”
The yield on the benchmark 10-year bond rose as much as 21 basis points to 6.89%, the highest since July 2019. The rupee fell 0.2% to 74.74 per dollar.
The government’s gross borrowing is estimated at about 15 trillion rupees ($200.7 billion) in the fiscal year starting April, according to the budget documents, much higher than 13 trillion rupees forecast in a Bloomberg survey. The target for the current year is 12.06 trillion rupees. Net borrowing, excluding maturities for next year, is estimated at 11.2 trillion rupees.
The administration also plans to issue sovereign green bonds for the first time as part its market borrowing in 2022-23, Finance Minister Nirmala Sitharaman said in her budget speech on Tuesday. The proceeds will be deployed in public sector projects which will help in reducing the carbon intensity of the economy, she said.
Bond yields have climbed more than 40 basis points in 2022 as the RBI ramps up its liquidity withdrawal in an effort to gradually normalize policy and amid rising global yields. The central bank has also stopped its bond purchases and banks, the biggest buyers are already overstocked, resulting in a demand-supply imbalance.
Ramkrishna referred to the unknown yogi as “Sironmani” [the exalted one] and shared with him information such as NSE’s five year projections, financial data, dividend ratio, business plans, agenda of board meeting, and even consulted him on employee performance appraisals.
Ramkrishna was ousted from NSE in 2016 for her role in the co-location and algo trading scam and abuse of power in the appointment of Subramanian. The probe found that Ramkrishna ran NSE with impunity. No one from the senior management, board, or the promoters — which include big government institutions and banks — ever objected to her ways. Instead, Ramkrishna was given ₹44 crore as pending dues and salary when she left NSE.
SEBI’s probe revealed that Ramkrishna communicated with the yogi, whom she had never met, over email, for almost 20 years and he guided her to appoint Subramanian as the second in command at NSE. “Their spiritual powers do not require them to have any such physical coordinates and would manifest at will,” Ramkrishna told SEBI. The contents of the email were not denied by her.
On January 18, 2013, Subramanian was offered the role of Chief Strategic Advisor at NSE for an annual compensation of ₹1.68 crore against his last drawn salary (as per his claim) of ₹15 lakh at Balmer Lawrie. In March 2014, Ramkrishna approved a 20 per cent increment to Subramanian and his salary was revised to ₹2.01 crore. Five weeks thereafter, Subramanian’s salary was again revised upwards by 15 per cent to ₹2.31 crore as Ramkrishna dubbed his performance to be A+ (exceptional). By 2015, his cost-to-company had zoomed to ₹5 crore, he was given a cabin next to Ramkrishna and granted first-class international air travel. All this was in accordance with the yogi’s instructions.
An email from the unknown yogi even carried the diktat that Subramanian be exempt from the contractual 5-day work week and instead be asked to come only for three days and allowed to work the rest of the time at will.
Another email on September 5, 2015, from the yogi told Ramkrishna, “SOM, if I had the opportunity to be a person on Earth then Kanchan is the perfect fit. Ashirvadhams.” On December 30, 2015, Ramkrishna told the Yogi in her reply, “SIRONMANI, struggle is I have always seen THEE through G, and challenged myself to on my own realise the difference.” ‘SOM’ refers to Ramkrishna, and ‘Kanchan’ and ‘G’ refer to Subramanian, the SEBI probe revealed.
These findings were confirmed by Dinesh Kanabar, the then Chairman of NSE nomination and remuneration committee. Subramanian had all the powers of the MD and CEO, and was flying first class, but remained a consultant on paper. SEBI had observed that there was a glaring conspiracy of a money making scheme involving NSE’s boss with the unknown person.
An email dated February 18, 2015, from Ramkrishna to the unknown yogi, reads, “The role and designation of Group Chief Coordination Officer is fine and we could take that forward. I have a small submission, can we make this as Group President and Chief Coordination Officer? And over a time frame as you direct we can move the entire operations of the exchange under G and redesignate him as Chief Operating Officer? Seek Your guidance on the path forward on this Swami If this meets with your Highness’ approval, then parallelly could we coin JR (Ravi) as Group President Finance and stakeholder relations and Corporate General Counsel?”
India’s $3.2 trillion stock market is witnessing an unprecedented foreign selloff as the surge in oil prices fuels worries of an inflation shock in the major energy-importing nation.
While global funds have been net sellers of local equities since the start of October, when the benchmark S&P BSE Sensex hit an all-time high, the pace of outflows has intensified since the start of the war in Ukraine. India relies on imports to meet about 85% of its oil needs.
India's merchandise trade deficit increased in February from a year earlier, government data showed Monday.
The trade deficit came in at $20.88 billion in February compared with a $13.12 billion deficit in the same month a year earlier.
Exports increased 25.10% on year to $34.57 billion, while imports rose 36.07% to $55.45 billion, the data showed.
India, Asia's third-largest economy, has been running a significant trade deficit for more than 15 years.
Foreign portfolio investor (FPI) flows into India may remain tepid in 2022, said a recent note by Goldman Sachs, who now peg the foreign portfolio investment into India at $5 billion in 2022, down from their earlier forecast of $30 billion with risks skewed to the downside.
“There has been $15 billion of equity outflows YTD in India already, and the IPO of the largest insurance company has been pushed out. Additionally, with no mention of India’s inclusion in global bond indices in the Union Budget, there are risks to our already conservative base case assumption of an announcement of India’s likely inclusion into the GBI-EM Global Diversified Bond Index in Q4-2022,” wrote Andrew Tilton, Goldman Sachs' chief Asia-Pacific economist in a co-authored report with Santanu Sengupta and Suraj Kumar
Adding: “With our view of monetary policy normalisation in India, and the US economics team’s view of additional 200 basis point (bp) rate hikes by the Fed in 2022, fixed income inflows in India may remain tepid.”
Equity inflows over the last three years from 2019-2021, according to a note by BofA Securities, totaled over $40 billion, out of which nearly $14 billion has left in the first quarter of 2022 (Q1-2022).
“The inflows were driven by tax reforms with government's strong focus on stimulating growth and loose monetary policy. As RBI is gradually moving towards tightening liquidity conditions and raise interest rates from mid-2022, we per our expectations, growth momentum would need to hold up in order to attract fresh allocation,” said the BofA Securities note.
Given the recent global developments and their impact on India's macros, Goldman Sachs has pegged an overall capital account surplus of $65 billion in calendar year 2022 (CY22), lower than $88 billion surplus in CY21, with balance of payment (BoP) deficit of $50 billion in CY22 (from $55 billion surplus in CY21, and over $100 billion surplus in CY20).
Elevated commodity prices
Despite the geopolitical concerns showing some signs of a thaw, Goldman Sachs expects the commodity prices to remain elevated going ahead as the sanctions imposed on Russian entities will likely remain in place for some time, further constraining supply in already tight commodity market.
They now forecast Brent at an average $120 a barrel (bbl) in Q2-2022, $135/bbl in the second half of 2022 (H2-2022), falling to $110/bbl in 2023.
In its latest ‘Monthly Economic Review’, the Ministry of Finance has painted an overall optimistic picture of the state of the domestic economy. “The World is looking at a distinct possibility of widespread stagflation. India, however, is at low risk of stagflation, owing to its prudent stabilization policies,” it states.
The economic growth outlook is likely to be affected by several factors owing to the trade disruptions, export bans and the resulting surge in global commodity prices —all of which will continue to stoke inflation — as long as the Russia-Ukraine conflict persists and global supply chains remain unrepaired. “However, the momentum of economic activities sustained in the first two months of the current financial year augurs well for India continuing to be the quickest growing economy among major countries in 2022-23,” states the Finance Ministry report.
But, given the uncertainties, the report highlights two key areas of concern for the Indian economy: the fiscal deficit and the current account deficit (or CAD).
The report states that “as government revenues take a hit following cuts in excise duties on diesel and petrol, an upside risk to the budgeted level of gross fiscal deficit has emerged”.
The fiscal deficit is essentially the amount of money that the government has to borrow in any year to fill the gap between its expenditures and revenues. Higher levels of fiscal deficit typically imply the government eats into the pool of investible funds in the market which could have been used by the private sector for its own investment needs. At a time when the government is trying its best to kick-start and sustain a private sector investment cycle, borrowing more than what it budgeted will be counter-productive.
The report underscores the need to trim revenue expenditure (or the money government spends just to meet its daily needs). “Rationalizing non-capex expenditure has thus become critical, not only for protecting growth supportive capex but also for avoiding fiscal slippages,” it states. “Capex” or capital expenditure essentially refers to money spent towards creating productive assets such as roads, buildings, ports etc. Capex has a much bigger multiplier effect on the overall GDP growth than revenue expenditure.
Current account deficit
The current account essentially refers to two specific sub-parts:
* Import and Export of goods — this is the “trade account”.
* Import and export of services — this is called the “invisibles account”.
If a country imports more goods (everything from cars to phones to machinery to food grains etc) than it exports, it is said to have a trade account deficit. A deficit implies that more money is going out of the country than coming in via the trade of physical goods. Similarly, the same country could be earning a surplus on the invisibles account — that is, it could be exporting more services than importing.
If, however, the net effect of a trade account and the invisibles account is a deficit, then it is called a current account deficit or CAD. A widening CAD tends to weaken the domestic currency because a CAD implies more dollars (or foreign currencies) are being demanded than rupees.
The Ministry’s worry is that costlier imports such as crude oil and other commodities will not only widen the CAD but also put downward pressure on the rupee. A weaker rupee will, in turn, make future imports costlier. There is one more reason why the rupee may weaken. If, in response to higher interest rates in the western economies especially the US, foreign portfolio investors (FPI) continue to pull out money from the Indian markets, that too will hurt the rupee and further increase CAD.
As surging inflation and the end of global easy-money policies send Indian stocks spiraling down from all-time highs, three charts show the pain is unlikely to end anytime soon.
The S&P BSE Sensex Index has fallen more than 15% from its October high, nearing the 20% loss that denotes a bear market. The selloff comes as climbing costs and a record plunge in the rupee have forced the nation’s central bank to join global peers in raising interest rates.
The Indian stock market’s value is already down nearly 20% from its January peak of about $3.7 trillion dollars. The unsupportive economic backdrop combined with an unprecedented exodus of foreign investors and earnings estimates that appear poised to tumble cloud the outlook for a rebound.
“We expect the markets to further correct from here,” said Benaifer Malandkar, chief investment officer at Raay Global Investments Pvt. “Expectation is that by the second quarter, most negative news, the outcome of the Fed’s actions will get priced in.”
Foreigner Flight
Overseas investors have been selling Indian stocks at a record pace, withdrawing about $32 billion from the market since September. The retreat of foreigners is part of a wave hitting nations including South Korea and Taiwan as well.
“India is not in isolation since it’s part of the emerging market basket, and clearly the EMs are out of favor,” said Raay Global’s Malandkar. “Until the US Fed rate is at its peak, we will see redemptions happening across EMs.”
Rosy Estimates
The drop in Indian equities has mainly been caused by valuation contraction so far. Earnings estimates for the NSE Nifty 50 Index are yet to clock a meaningful decline like that seen in MSCI Inc.’s broadest measure for Asian equities.
Over the past few weeks, strategists at Sanford C. Bernstein Ltd., Bank of America Corp. and JPMorgan Chase & Co. have expressed concerns about the earnings optimism that has surrounded India. Pending any rebound in valuations, estimate cuts are likely to pull stocks down further.
Suffering Small-Caps
Smaller stocks have been hit harder by investor risk aversion, with gauges of small and mid-cap Indian shares having already entered bear markets. Market breadth has weakened, with just 16% of S&P BSE 500 Index stocks trading above their 200-day average level, the lowest level in two years.
Foreign portfolio investors have pulled out Rs 42,000 crore this month amid rising inflation and monetary policy tightening in the US. How does this impact the market and the rupee, and what should you do?
https://indianexpress.com/article/explained/fpi-exit-stock-market-global-economy-7987295/
Sustained capital outflows from the capital market have unnerved the stock markets and led to a weakening of the rupee amid rising inflation across the globe. With the US Federal Reserve set to hike rates further, outflows are likely to continue, putting pressure on the Indian currency.
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Aggressive rate hike by the US Federal Reserve, coupled with elevated inflation and high valuation of equities continued to keep foreign investors at bay from the Indian stock market as they pulled out Rs 31,430 crore in this month so far. With this, net outflow by Foreign Portfolio Investors (FPIs) from equities reached Rs 1.98 lakh crore so far in 2022, data with depositories showed. Going forward, FPI flows to remain volatile in the emerging markets on account of rising geopolitical risk, rising inflation, tightening of monetary policy by central banks, among others, Shrikant Chouhan, Head - Equity Research (Retail), Kotak Securities, said. According to the data, foreign investors withdrew a net amount of Rs 31,430 crore from equities in the month of June (till 17th).
http://www.millenniumpost.in/business/fpis-withdraw-rs-31430-crore-from-indian-equity-markets-in-june-so-far-482678
The massive selling by FPIs continued in June too as they have been incessantly withdrawing money from Indian equities since October 2021. Shrikant attributed latest selling to rising inflation, tight monetary policy by global central banks and elevated crude oil prices. Global investors are reacting to increased risks of a global recession as the US Federal Reserve was forced to raise interest rates by 75 basis points due to persistently elevated inflation. Moreover, it also indicated to continue its aggressive stance to contain stubbornly high inflation. "Strengthening of the dollar and rising bond yields in US are the major triggers for FPI selling. Since the Fed and other central banks like Bank of England and Swiss central bank have raised rates, there is synchronised rate hikes globally, with rising yields. Money is moving from equity to bonds," V K Vijayakumar, Cheif Investment Strategist at Geojit Financial Services, said.
On the domestic side as well, inflation has been a cause for concern, and to tame that, RBI has also been increasing rates
https://economictimes.indiatimes.com/news/economy/indicators/india-the-worlds-sixth-biggest-economy-feels-heat-from-em-investor-exodus/articleshow/92608992.cms
Investors reeling from the brutal emerging markets selloff over the past six months again fled the rupee as India’s currency hit new lows, prompting the government to curb gold imports and oil exports to arrest a widening deficit.
The government raised import taxes on gold, while increasing levies on exports of gasoline and diesel in an attempt to control a fast-widening current account gap. The moves sent Reliance Industries Ltd NSE -7.20 %. and other energy exporters tumbling, bringing down the benchmark index by as much as 1.7%. The rupee fell again.
The actions underscore how emerging economies, specially with twin current account and fiscal deficits, are increasingly facing pressures on their currencies as forceful rate hikes by the Federal Reserve accentuate outflows. Despite having the world’s fourth-biggest reserve pile, the rupee has hit a succession of record lows in recent weeks. The Indonesian rupiah, the other high-yielder in Asia, fell to its lowest in two years on Friday.
Policy makers in many emerging markets face stark choices as they battle soaring inflation and capital flight as the Fed tightens policy: raise rates and risk hurting growth, spend reserves that took years to build to defend currencies, or simply step away and let the market run its course.
New Delhi’s move also underscores the economic challenges faced by Prime Minister Narendra Modi’s government as inflation in the world’s sixth-largest economy accelerates and external finances worsen. The central bank has been battling to slow the currency’s decline, and runaway rupee depreciation will worsen price pressures, and may spur more rate hikes that weigh on growth.
The measures “aim to reduce the impending pressure on the current account deficit and thus the currency,” said Madhavi Arora, lead economist at Emkay Global Financial Services. “Complementary policy efforts from both fiscal and monetary side essentially reflects the looming pain on the balance of payments deficit this year.”
While the Reserve Bank of India has been seeking to smooth out the rupee’s 6% decline this year, banks have reported dollar shortages as investors and companies rushed to swap the rupee for other assets or to pay for imports. The latest measures were spurred by a sudden surge of gold imports in May and June, the Finance Ministry said Friday.
The government raised the import duty on gold to 12.5%, reversing a cut last year. The higher taxes on shipments of gasoline and diesel sent shares of Reliance Industries, a key exporter, down by as much as 8.9%.
India is the world’s second-biggest gold consumer and local futures rose as much as 3% in Mumbai, the biggest intraday jump in almost four months, due to the higher import costs.
Finance Minister Nirmala Sitharaman said on Friday that India is seeking to discourage gold imports as it helps preserve foreign exchange. She added “extraordinary times” require such measures including the imposition of a windfall tax on fuel exports.
“The challenges are emanating from the same source, which is higher commodity prices,” said Rahul Bajoria, senior economist, Barclays Bank Plc. “India can neither find supply onshore nor we will be able to cut back the consumption of oil. That makes the whole situation a lot more unpredictable both in terms of how this plays out and how long this continues for.”
For the broader fuel market, a drop in Indian exports could further tighten global markets that are grappling with reduced supply from Russia and rising post-pandemic demand.
https://www.business-standard.com/podcast/economy-policy/where-is-india-s-economy-headed-after-finmin-s-twin-deficit-warning-122062200104_1.html
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Amid these signs of slowing growth, further shocks could be in store. The finance ministry has warned of a twin deficit problem, with higher commodity prices and rising subsidy burden leading to an increase in both the fiscal and current account deficits.
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According to the ministry’s latest Monthly Economic Review, an increase in the fiscal deficit might cause the current account deficit to widen and weaken the value of the rupee. This could further aggravate external imbalances, creating the risk, which is admittedly low, at this time, of a cycle of wider deficits and a weaker currency.
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But, at the same time, the report also said that even as the world was looking at a distinct possibility of widespread stagflation, India was at low risk due to its stabilisation policies.
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Meanwhile, Indian financial markets have witnessed hefty foreign investment outflows the past eight months. A weak GDP growth outlook has exacerbated the situation. However, a paper co-authored by Reserve Bank of India’s deputy governor Michael Debabrata Patra says that there is only a five per cent chance of portfolio outflows of up to 3.2 percent of GDP in a year in response to a Covid-type contraction in growth.
In a black swan event comprising a combination of shocks, there is a 5 percent chance of outflows under portfolio investments of 7.7 per cent of GDP and short-term trade credit retrenchment of 3.9 percent of GDP.
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Create the graphic of a torn scrap of paper with the following text in it: “A black swan event could be characterised by a combination of all adverse shocks experienced in Indian history coming together, leading to a perfect storm.”
The warning about a twin deficit begs the question -- Will the government have to prioritise macroeconomic stability over near-term growth going ahead?
Investors reeling from the brutal emerging markets selloff over the past six months again fled the rupee as India's currency hit new lows, prompting the government to curb gold imports and oil exports to arrest a widening deficit.
The government raised import taxes on gold, while increasing levies on exports of gasoline and diesel in an attempt to control a fast-widening current account gap. The moves sent Reliance Industries Ltd. and other energy exporters tumbling, bringing down the benchmark index by as much as 1.7%. The rupee fell again.
The actions underscore how emerging economies, specially with twin current account and fiscal deficits, are increasingly facing pressures on their currencies as forceful rate hikes by the Federal Reserve accentuate outflows. Despite having the world's fourth-biggest reserve pile, the rupee has hit a succession of record lows in recent weeks. The Indonesian rupiah, the other high-yielder in Asia, fell to its lowest in two years on Friday.
Policy makers in many emerging markets face stark choices as they battle soaring inflation and capital flight as the Fed tightens policy: raise rates and risk hurting growth, spend reserves that took years to build to defend currencies, or simply step away and let the market run its course.
New Delhi's move also underscores the economic challenges faced by Prime Minister Narendra Modi's government as inflation in the world's sixth-largest economy accelerates and external finances worsen. The central bank has been battling to slow the currency's decline, and runaway rupee depreciation will worsen price pressures, and may spur more rate hikes that weigh on growth.
The measures “aim to reduce the impending pressure on the current account deficit and thus the currency,” said Madhavi Arora, lead economist at Emkay Global Financial Services. “Complementary policy efforts from both fiscal and monetary side essentially reflects the looming pain on the balance of payments deficit this year.”
While the Reserve Bank of India has been seeking to smooth out the rupee's 6% decline this year, banks have reported dollar shortages as investors and companies rushed to swap the rupee for other assets or to pay for imports. The latest measures were spurred by a sudden surge of gold imports in May and June, the Finance Ministry said Friday.
Commodity Pressures
The government raised the import duty on gold to 12.5%, reversing a cut last year. The higher taxes on shipments of gasoline and diesel sent shares of Reliance Industries, a key exporter, down by as much as 8.9%.
India is the world's second-biggest gold consumer and local futures rose as much as 3% in Mumbai, the biggest intraday jump in almost four months, due to the higher import costs.
Finance Minister Nirmala Sitharaman said on Friday that India is seeking to discourage gold imports as it helps preserve foreign exchange. She added “extraordinary times” require such measures including the imposition of a windfall tax on fuel exports.
“The challenges are emanating from the same source, which is higher commodity prices,” said Rahul Bajoria, senior economist, Barclays Bank Plc. “India can neither find supply onshore nor we will be able to cut back the consumption of oil. That makes the whole situation a lot more unpredictable both in terms of how this plays out and how long this continues for.”
For the broader fuel market, a drop in Indian exports could further tighten global markets that are grappling with reduced supply from Russia and rising post-pandemic demand.
Big Reserves
Friday's measures highlight the central bank has a tough fight on the external front in coming months. RBI Governor Shaktikanta Das has said the central bank uses a multi-pronged intervention approach to minimize actual outflows of dollars and won't allow a runaway rupee depreciation.
And while investors have been put on watch over emerging-market stress by Sri Lanka's struggle with a dollar crunch leading to hyperinflation, the RBI has close to $600 billion of foreign-exchange reserves. But those reserves are depleting as the central bank steps up its fight to stop the slide in the rupee amid capital outflows and a current account gap that is expected to double this year.
“Investors should expect the currency to still depreciate,” said Arvind Chari, chief investment officer at Quantum Advisors Pvt. in Mumbai. “Will more taxes on exports impact corporate activity? Maybe not in the short term but it could in the medium to long term.”
https://www.thehindubusinessline.com/opinion/are-indias-forex-reserves-adequate/article65600445.ece
International Investment Position, which is a better metric than import cover, paints a less-than-rosy picture
India has witnessed outflows of $29 billion in 2022 YTD ($27 billion in equity and $2 billion in debt). Alongside, India’s foreign exchange reserves have declined from a peak of $642 billion as of October 29, 2021, to $590.50 billion in June 2022, a fall of $51.50 billion. There seems no stopping these trends in the immediate future.
While the large decline in forex reserves is comparable to that of previous episodes of stress (Table 1), there is an air of comfort that the current level of forex reserves are large enough to cover almost 12 months of imports, whereas in the previous episodes of 2008, 2013 and 2018 it used to be between seven and nine months.
However, the key question is whether the metric of import cover reflects adequacy of reserves? It is prudent to measure the adequacy of reserves with reference to the dynamics that prevails in the accretion of the reserves.
India has had a structural current account deficit which has been funded by capital inflows. It is common knowledge that the accretion of forex reserves has been due to surplus in capital account.
India’s reserves built on net capital surpluses therefore presents a double whammy as reserves have to fund the import bill, with around 27 per cent of imports in value composed of oil, and the constant stream of capital outflows.
Therefore, the use of import cover as a measure of adequacy of reserves is not appropriate in the Indian context and one has to look at the adequacy of reserves from the point of view of International Investment Position or IIP.
What is IIP?
IIP is a summary statement of the net financial position of a country viz. net of, the value of financial assets of residents of an economy that are claims on non-residents and, gold held in reserve assets and liabilities of the residents of an economy to non-residents.
Assets comprise direct and portfolio financial investments of residents outside India plus reserve assets. Liabilities are direct and portfolio investments made by non-residents into India (Table 2). Positive IIP indicates that the country’s assets are more than liabilities while negative IIP means that the country’s liabilities are more than assets.
India is a net IIP negative country with its liabilities exceeding assets (Chart 1).
Not robust enough
Looking at the reserves-to-IIP ratio in India, it is observed that the current level is not as robust as it prevailed at the time of the Global Finance Crisis of 2008. In addition, a look at the reserves to liabilities ratio shows that it has been steadily below 50 per cent since 2010 (Chart 2).
Out of $1.3 trillion of liabilities within IIP, as of December 2021, approximately 30 per cent comprises short-term debt and portfolio investments. In absolute terms, outstanding portfolio investments is $277 billion and short-term debt of $110 billion. Which takes the cumulative portfolio and short-term debt to around $390 billion.
Against the backdrop of $591 billion of reserves, it leaves a cushion of $199 billion, which at the current rate of $60-63 billion of imports leaves an import cover around 3.25 months.
Thus, import cover is not an appropriate metric to measure the adequacy of reserves for a country like India. Import cover must be looked in conjunction with IIP which gives a true picture of the adequacy of reserves.
In the present situation, thinking of a robust import cover of reserves alone without taking IIP and liabilities into context indicates “a glass half full”.
https://www.cnbctv18.com/economy/trade-deficit-at-record-25-63-billion-in-june-exports-increase-by-168-percent-14027792.htm
India's merchandise trade deficit grew to a record $25.63 billion in June from $9.61 billion during the same period last year, stated the data released by the Commerce Ministry.
The trade deficit in the April to June period this year was $70.25 billion.
The country's merchandise exports increased by 16.8 percent year-on-year to $37.9 billion in June 2022, the highest-ever recorded in the month, the data stated.
On the other hand, imports expanded to 51.03 percent year-on-year to $63.58 billion. The monthly imports and trade decifit were among the highest-ever, in June 2022.
The merchandise exports during the first quarter of this fiscal year jumped 22 percent to $116.7 billion, the highest-ever exports recorded during the first quarter.
Non-petroleum exports increased by 11.9 percent to $92.5 billion in the first quarter, which also recorded a major rise in the exports of petroleum products, electronic goods and readymade garments.
The country saw a positive growth in imports of top 10 major commodity groups from June 2021 to June 2022. There was a 94.17 percent rise in petroleum and crude import, 241 percent rise in coal and coke import, 169 percent increase in gold import and 51 percent rise in total imports.
Cotton yarn exports fell by 22.54 percent, plastic exports reduced by 22.23 percent, engineering goods by 1.57 percent and drug and pharma exports by 1.27 percent.
There was a positive growth in all other major export categories from June 2021 to June 2022.
India’s central bank mounted a fresh defense of the beleaguered rupee, announcing a raft of measures to boost foreign exchange inflows and stem a rout in the local currency.
The steps include doubling borrowing limits for companies from overseas to $1.5 billion during a financial year, the Reserve Bank of India said in a statement Wednesday. It also temporarily removed any interest-rate ceiling for banks to attract deposits from non-residents and liberalized rules for foreigners to invest in local currency government and corporate debt.
https://economictimes.indiatimes.com/news/economy/finance/re-may-face-more-heat-as-repayments-worth-267-bn-of-621-bn-external-debt-come-up/articleshow/92687264.cms
The rupee, which Tuesday fell to a new record low on unabated withdrawals by portfolio investors amid tightening global monetary conditions, could face further pressure as record external debt comes up for repayment through the course of this fiscal year and the next and India's trade gap widens.
More than 40%, or $267 billion worth of external debt of the total $621 billion, is due for repayment in the next nine months, the Reserve Bank of India data showed. This repayment is equivalent to about 44% of the India's foreign exchange reserves.
"The current local macro setup is driven by a record current account deficit, primarily due to oil imports," said Ashhish Vaidya, managing director, DBS Bank India. "Coupled with this, the overall dollar strength, triggered by higher US rate trajectory and risk-off sentiment, is contributing to rupee's rout."
India’s trade deficit ballooned to a record high in July, as elevated commodity prices and a weak rupee inflated the country’s import bill.
The gap between exports and imports widened to $31.02 billion in July, from $26.18 billion in June, B.V.R Subrahmanyam, India’s trade secretary, told reporters at a briefing in New Delhi Tuesday, citing preliminary data. The trade deficit in June was a record before the latest numbers were released.
India's record high trade deficit in July signals a further deterioration in the country's external balances, which is likely to keep the rupee under pressure, analysts said on Wednesday.
Trade deficit in Asia's third largest economy widened to an all-time high of $31 billion, data on Tuesday showed, prompting concerns about the country's ability to fund its current account deficit and hurting the outlook for the rupee.
"I think after looking at the July trade deficit, we need to re-work on our CAD and BoP number, and thus the view on the rupee", Vikas Bajaj, head of currency derivatives at Kotak Securities, said.
Bajaj pointed out that until now the market consensus for India's current account deficit (CAD) was around $100 billion for the current fiscal year ending in March.
"But this definitely looks out of whack after July's trade number," he said.
In a note on Wednesday, QuantEco Research revised their CAD projections higher for the current fiscal year to $130 billion from $105 billion and the balance of payments (BoP) estimate to $60 billion from $35 billion.
The partially convertible rupee was trading at 79.02 per U.S. dollar in afternoon trade, 0.4% weaker on the day. On Tuesday, the unit had touched 78.49, its highest level since June 28. The local currency hit a record low of 80.0650 on July 19.
Vivek Kumar, a economist at QuantEco, said the recent recovery in the rupee from 80 will prove to be temporary and expects the local unit to fall to 81 to the dollar in the current fiscal year.
Bajaj said the recovery on the rupee was "broadly done" and that the currency "should once again see slow and steady move towards 80+ levels".
@RiteshEconomist
We shouldn't get carried away by 13.5% #GDPgrowth in Q1 FY2022/23.
Q1FY2020/21: INR 35.5 trillion
Q1FY2022/23: INR 36.85 trillion
The increase in 3 years: INR 1.35 trillion or 3.9% in 3 years.
#economy #India #IndiaAt75
@EconomicTimes
https://twitter.com/RiteshEconomist/status/1564989770966523905?s=20&t=Xfj8WjDj-wkroo8JTkhBxQ
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Q1 GDP growth misses estimates despite low base; govt spending subdued
13.5% expansion in June QTR despite low base; GVA at basic prices up 12.7%
https://www.business-standard.com/article/economy-policy/q1-gdp-growth-misses-estimates-despite-low-base-govt-spending-subdued-122083101151_1.html
Keeping the two pandemic years of 2020 and 2021 out, Q1 real GDP in 2022-23 is only 3.8 per cent higher than in the equivalent quarter of 2019-20. Gross value added (GVA) at basic prices grew at 12.7 per cent in the June quarter while nominal GDP was up 26.7 per cent, reflecting elevated inflationary pressures in the economy.
Growth in private final consumption expenditure, or private spending, grew at a robust 25.9 per cent with pent-up demand kicking in as consumers felt confident to spend. Government spending, however, grew only 1.3 per cent, signalling that both the Central and state governments kept their expenditure in check during the quarter.
Gross fixed capital formation (GFCF), which represents investment demand in the economy, grew at a robust 20.1 per cent. However, compared to the pre-pandemic period of FY20, GFCF grew only 6.7 per cent.
On the supply side, manufacturing grew by a disappointing 4.8 per cent. Despite 25.7 per cent growth in trade, hotel, transport services, the sector, with the highest contribution to GDP, is still 15.5 per cent below the pre-pandemic level of the equivalent quarter in FY20.
The labour-intensive construction sector grew 16.8 per cent but it is barely above the pre-pandemic level, growing 1.2 per cent.
Madhavi Arora, lead economist, Emkay Global Financial Services, said. “We maintain growth may remain at 7 per cent for the year, albeit with downside risks. Going ahead, even as recovery in domestic economic activity is yet to be broad-based, global drags in the form of still elevated prices, shrinking corporate profitability, demand-curbing monetary policies and diminishing global growth prospects weigh on the growth outlook.”
Nikhil Gupta, chief economist of Motilal Oswal, said assuming no change in projections by the RBI for the rest of the year, the first-quarter data suggested the central bank’s FY23 growth forecast would be revised to 6.7 per cent from 7.2 per cent.
The RBI expected 16.2 per cent growth in Q1, with 6.2, 4.1, and 4 per cent growth in the subsequent quarters.
Aurodeep Nandi, India economist and vice-president at Nomura, said even if one were to discount the low base, this marked a stellar rise in sequential momentum with post-pandemic tailwinds lifting GDP growth in the June quarter.
India’s Forex reserve lose $80 bn in 8 months as RBI defends rupee, quarterly CAD at alarming level
https://youtu.be/NXns1Im7QNg
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Indias foreign exchange reserves fall to lowest in 23 months
https://www.business-standard.com/article/finance/india-s-forex-reserves-fall-8-billion-in-a-week-as-rbi-defends-rupee-122090901004_1.html
The Reserve Bank of India’s (RBI’s) headline foreign exchange reserves declined by $7.9 billion to $553.11 billion in the week ended September 2, the latest central bank data showed.
The reserves are at their lowest since October 9, 2020, the RBI data showed. Analysts cited the RBI’s defence of the rupee through dollar sales amid a globally strengthening greenback as one of the reasons for the fall in reserves.
Incidentally, during the week that ended September 2, the rupee marked a fresh intraday low of 80.13 per US dollar.
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Why are India's foreign reserves depleting, and what could it mean for the country? - BusinessToday
https://www.businesstoday.in/latest/economy/story/why-are-indias-foreign-reserves-depleting-and-what-could-it-mean-for-the-country-347234-2022-09-14
India’s central bank raised its key interest rate by half a percentage point, as efforts to rein in inflation and protect an economic recovery have been complicated by its currency’s decline against the U.S. dollar.
On Friday, the Reserve Bank of India raised its overnight lending rate to 5.90% from 5.40%, the fourth increase since it began raising rates following an unscheduled meeting in May, prompted by global inflationary pressures exacerbated by Russia’s invasion of Ukraine.
RBI Gov. Shaktikanta Das said that having witnessed the major shocks of the coronavirus pandemic and the conflict in Ukraine, the global economy is now in the midst of a third major shock arising from aggressive monetary policy tightening from advanced economies that is having spillover effects on the rest of the world.
“There is nervousness in financial markets with potential consequences for the real economy and financial stability,” Mr. Das said. “The global economy is indeed in the eye of a new storm.”
The pace at which the U.S. Federal Reserve has raised rates, coupled with growing fears of a global recession, have strengthened the dollar and heaped downward pressure on other currencies. The Fed approved its third consecutive interest-rate rise of 0.75 percentage point last week and signaled additional large increases as inflation remains stubbornly high. Central banks around the world continue to tighten their own monetary policy.
The British pound hit its lowest-ever level against the U.S. dollar this week as investors worried about the government’s plans to cut taxes and the Bank of England warned it would raise interest rates as much as needed to hit its inflation targets. The Chinese yuan slid to its weakest level against the dollar in more than a decade, and Japan intervened in the foreign-exchange market for the first time in 24 years to support the yen.
In India, the rupee is down about 9% this year against the dollar. Despite the RBI’s efforts to defend the currency, it slumped in July past 80 rupees per dollar to record lows. That defense has contributed to an almost $100 billion decrease in India’s foreign-exchange reserves over the past year to $545 billion. The RBI also attributes some of that decrease to the change in value of other currencies it holds.
Mr. Das said the global economic outlook remains bleak, with recession fears mounting and inflation persisting at “alarmingly high levels” across multiple jurisdictions.
“Central banks are charting new territory with aggressive rate hikes even if it entails sacrificing growth in the near-term,” he said.
Emerging-market economies in particular, Mr. Das said, are confronting challenges of slowing global growth, elevated food and energy prices, debt distress and sharp currency depreciations. Despite the unsettling global environment, he added, the Indian economy remains resilient.
Robert Carnell, Asia-Pacific chief economist at ING Bank, said a weak rupee was more troublesome from the point of view of imports becoming more expensive rather than from any external debt issue, given India’s debt levels remained relatively low.
Mahesh Vyas, the managing director of the Centre for Monitoring Indian Economy, said while the principal objective of the RBI’s currency intervention is to avoid volatility, support for the rupee for any given value is futile.
“Government efforts can delay the slide of the rupee but it cannot stop it,” he said.
The sharp decline of Asian currencies has sparked concerns within global financial markets over rising debt burdens among regional governments and corporate borrowers.
Asian countries are raising policy rates at a slower pace than the U.S. That, combined with deteriorating trade balances, has caused some Asian currencies to depreciate 10% or more against the dollar since the end of March.
The South Korean won has declined by 17% against the greenback during those seven months. The Philippine peso took a 12% hit. The Indian rupee is down by 10%, sinking below the level during the 1997 Asian currency crisis.
When the Vietnamese dong depreciated below the currency crisis level, the State Bank of Vietnam widened the daily exchange rate trading band to plus or minus 5% from 3%. The central bank may have faced increasing difficulty in defending the national currency.
Governments and businesses in emerging markets frequently take on debt denominated in the dollar or other foreign currencies. The overall debt in South Korea, India and Thailand is 70% denominated by foreign currencies, according to statistics from the World Bank and the International Monetary Fund. In the Philippines, the share is 97%.
Foreign-currency-denominated debt is preferred over debt denominated by domestic currency because of the typically lower interest rates for the former. On top of that, foreign-currency-denominated debt stands a better chance of drawing investors because of the reduced foreign exchange risk.
The funds raised by issuing debt are commonly converted into local currencies. But when it comes time to pay back the debt, the local currency needs to be translated back to the dollar, for example. If the local currency has grown weak, the government or the company needs to pay more in the local currency to settle the debt.
Amid fears debt obligations will swell, rates for credit default swaps have climbed. These rates serve as barometers for concern over nonpayment of debt.
The costs for five-year credit default swaps for government bonds have started to rise. The rates in the Philippines and Indonesia stand at 1.3% and 1.4%, respectively, more than doubling from the end of March and reaching a high not seen in two and a half years.
The credit default swap rate for South Korean government bonds has hit 0.7%, a level last seen in November 2017.
Credit default swap prices are on the rise for corporate debt too. The spread for the credit default swap index composed of 40 major Asian companies outside of Japan has expanded to an 11-year high of 2.3%.
"Investors are guarding against worsening credit worthiness due to the depreciating currencies," said Toru Nishihama, chief economist at the Dai-ichi Life Research Institute.
Equity markets have been conspicuously lackluster in Asia. The MSCI Asia ex Japan index is down 28% from the end of 2021. That compares unfavorably to the MSCI world index, which is off by 18%.
When these stock trends are paired with heavier debt payment loads, companies will have less access to funds to invest in growth.
For international investors trading in dollar-denominated assets, a drop-off in Asian currency values equates to diminishing dollar-based returns.
"If a currency is anticipated to depreciate, international investors will be less willing to invest in Asian stocks out of concerns over forex loss," said Kota Hirayama at SMBC Nikko Securities.
Because Asia is a global manufacturing center, weaker currencies normally lead to increased exports and improved corporate earnings. But worldwide interest rate hikes have opened up concerns over a recession that would undercut business performance.
https://www.reuters.com/world/india/indias-current-account-gap-widens-9-year-high-2022-12-29/
MUMBAI, Dec 29 (Reuters) - India's current account deficit widened in the July-September quarter as high commodity prices and a weak rupee increased the country's trade gap, data from the Reserve Bank of India (RBI) showed on Thursday.
In absolute terms, the current account deficit (CAD) (INCURA=ECI) was $36.40 billion in the second quarter of fiscal year 2022/23, its highest in more than a decade. As a percentage of GDP, it was 4.4%, its highest since the June quarter of 2013.
The CAD was $18.2 billion, or 2.2% of GDP, in the preceding April-June quarter, while the deficit was $9.7 billion, or 1.3% of GDP, in the same quarter a year earlier, the release showed.
In a statement, the RBI linked the widening deficit to the increase of "the merchandise trade deficit to $83.5 billion from $63.0 billion in Q1 2022/23 and an increase in net outgo under investment income".
In its Financial Stability Report released after the data, it said the widened trade deficit reflected "the impact of slowing global demand on exports, even as growth in services exports and remittances remained robust".
The median forecast of 18 economists in a Dec. 5-14 Reuters poll was for a $35.5 billion CAD in the July-September quarter.
The RBI said services exports reported growth of 30.2% on a year-on-year (y-o-y) basis, driven by exports of software, business and travel services, while net services receipts increased sequentially and y-o-y.
Private transfer receipts, mainly representing remittances by Indians employed overseas, rose by 29.7% to $27.4 billion from a year earlier.