India may be De-Coupled

MUMBAI: India stood out like a sore thumb, with the rupee crashing to a new low and stocks falling while the rest of the world rallied on hopes that Europe, the epicentre of financial turmoil, may shift its stance to growth from austerity.The effect of the Reserve Bank of India ’s (RBI) move to curtail currency arbitrage on Monday was short-lived as policy inaction led to Morgan Stanley lowering its forecast for economic growth. The slide resumed when the demand for US dollars from oil importers and a government department hit the market, said traders.Finance Minister Pranab Mukherjee left the fate of the currency to market forces, saying, “The government is taking a series of steps. However, managing rupee is market-related... There is a lot of volatility.”Investors worry that policymakers are running out of ammunition to protect the currency, which is already down about a quarter since last July despite curbs on speculation.“It seems all grim,” Morgan Stanley’s Ridham Desai said in a note. “The macro mix exposes India to global events more than it may choose to.” Morgan forecasts current account deficit — the excess of imports over exports — and fiscal deficit to fall this year, which will help equities.The rupee fell 0.7% to 55.39 per dollar at close, after touching an all-time low of 55.47. The Sensex lost 1% to end at 16,026.41, its lowest level since January 9 and is off 13% from its February 21 high, Bloomberg data shows.Fitch Ratings’ downgrade of Japan’s long-term local currency by a notch, and Morgan Stanley reducing India’s growth forecast to 6.3% from 7% for fiscal 2013 weakened investor sentiment.While stocks and currencies of most countries are weakening as investors fear Greece’s exit from the euro could lead to a financial catastrophe, India is faring worse since its deteriorating macroeconomic fundamentals are multiplying woes. The enormous demand for imported products, with the government subsidising oil prices, and the sudden stoppage of overseas fund flows are pressuring the rupee.The government needs to lure foreign investors with friendly policies. “The next target we are looking at is 56 per dollar,” said Navin Raghuwanshi, senior VP, Development Credit Bank.“Sixty per dollar looks very ambitious at this point, though with what we have seen in the recent past, nothing seems impossible. I think, alarm bells may start ringing at 56-57 per dollar, and the regulators may do something drastic at that point to stop the fall.”The Stoxx Europe 600 Index rose 1.2% and the MSCI All-Country World Index climbed 0.5% on hopes that Wednesday’s meeting of European leaders in Brussels could throw up some plan to save the euro. European leaders will do “everything necessary” to keep Greece in the euro grouping, German Finance Minister Wolfgang Schaeuble had said.But India may be de-coupled since it faces its own set of macro troubles. The RBI has probably used up most of the tools at its disposal since December last, when rising current account and fiscal deficit triggered an outflow of US dollars. It eased interest rates for non-resident Indians and forced corporates to bring in their dollar earnings.There could be a few more measures up the central bank’s sleeve like forcing Indian corporates with surplus in overseas operations to bring in the dollars, though it may be read as a sign of desperation. “The measures taken yesterday were rendered ineffective,” said Hariprasad, head of treasury, Centrum Direct.“Rupee is a purely domestic story now, driven by the fundamentals. There is nervousness in the market, and it is very difficult to forecast the levels now. It is a unidirectional fall and markets are looking up to the government now for some clues.”Some valuation models of banks show that the currency could fall to 63 to the dollar. Goldman Sachs, which raised the year-end currency target to 50 per dollar from 49, its model shows a lower level. The so-called Goldman Sachs Dynamic Equilibrium Exchange Rate Model, which reflects the global context that captures factors in both the developed and developing world, shows the rupee may fall to as low as 63.5.Even the global markets may turn shaky as the Greece sovereign crisis, which has been playing for two years, explodes if the second election in months also leads to a fractured mandate. Some fear that the financial markets may remain volatile with banks shrinking their balance sheets to reduce risk. “Global economies will de-lever for what seems like forever,” Bill Gross, managing director and co-CIO of PIMCO, said in a tweet.