No Indian Summer to Come?
As markets head into the last quarter midst talk of fledgling recovery in the US and Euro-zone the woes continue to pile up for INR (Indian Rupee) .Despite EM showing some short term buoyancy mainly due to the Feds decision to continue monetary stimulus and bold steps by the new governor of the Reserve Bank the INR has continued to pare its losses .Apart from the currency woes investors seem to be questioning their stance on India and whether the idea that the economy can continue to deliver the growth needed to stay on track.Whilst global funds pulled $12.6 billion from Indian stocks and bonds the rupee plunged to a record low and caused short-term borrowing costs to soar, sending the government’s two-year bond yield to the biggest premium to the 10-year rate since 2001.(source Bloomberg)
Investors remain skeptical of the governments ability to stem the flow and tackle budget and current account deficits that have precipitated the moves.Prime Minister Manmohan Singh remains a weak figure as he boosts food subsidies to woo voters before a May 2014 election.Global names have now started to join the exodus with Arcelor Mittal (MT) and Posco scrapping plans for $12 billion of investments and two years after describing India as a “dream “ market Warren Buffet ,his company Berkshire Hathaway exiting an insurance distribution venture.
Ratings agencies have not been quiet either with Standard and Poor saying that India could lose its investment grade status within two years whereas PIMCO sees a large chance of a cut within 6 months.
Investors remain skeptical whether the RBI alone can fix the economy, which Goldman Sachs Group Inc. predicts will expand 4 percent in the fiscal year through March. While the rupee has rebounded 11 percent from an unprecedented 68.845 per dollar on Aug. 28, Goldman sees a decline to 72 by the first quarter of 2014. Macquarie Group Ltd. predicts a drop to 75.
Weakened by corruption scandals and the loss of allies, Singh’s government has passed the fewest bills ever by an administration sitting a five-year term. That is allowing imbalances to build in Asia’s third-largest economy. Comparisons to previous crisis seem moot as the nation has amassed much larger FX reserves and can cover 7 months of imports now if needed however despite an expectation from the market of new measures by the RBI and the government if these measures are at odds with local government another downward spiral in the currency could come around with funds starting another exodus.Faced with ever tougher decisions its fair to say that the coming months wont be an Indian summer.