India’s total external public debt has risen to $326 billion while foreign exchange reserves have dropped to $293 billion, according to the RBI data reported by the Indian Express newspaper.
The Reserve Bank of India is concerned over the increasing shift from equity to debt to fill India's widening current account gap. The latest available data indicates that foreign debt inflows in January so far have amounted to $3.21 billion versus $1.7 billion through equity inflows.
Recent $1.1 billion bail-out of Reliance Communications by state-owned Chinese banks is the clearest indication yet that the situation is also becoming dire in India's private sector with its mounting foreign debt.
This is not the first instance of Chinese banks coming to the aid of an Indian company. Last November, Sasan Power, the project company for the Sasan ultra mega power plant and a subsidiary of RComm affiliate Reliance Power, completed a $2.2 billion refinancing, including a $1.114 billion 13-year tranche. Bank of China, CDB and Chexim took $1.06 billion of that tranche, for which Chinese export credit agency Sinosure provided insurance.
Reliance Com is not alone in facing cash crunch in their ability to service debt. More than two dozen Indian companies included in the BSE-500 index face redemptions on foreign currency convertible bonds worth a combined Rs330 billion ($6.5 billion) by March 2013, according to brokerage Edelweiss. These include RComm’s US$925m outstanding CB, which the loan will repay.
Unless other Indian borrowers can somehow find lenders, they will be facing deteriorating debt market conditions that have led to shrinking liquidity in the loan markets and a rise in pricing.
“Top-tier Indian firms will have to pay between 250 basis points (2.5%) and 300 basis points (3.0%) over LIBOR (London Inter-bank Borrowing Rate) to borrow five-year money offshore. Even at that kind of pricing, there isn’t a lot of liquidity available,” said a Hong Kong-based lender quoted by International Financing Review. Over $20 billion worth of Indian debt is set to mature in 2012 and, of that, about $6 billion each of convertible bonds and rupee loans are up for redemption, with the balance in offshore loans.
India continues to run huge twin deficits of current account and budget. It depends heavily on foreign inflows. United Nations data shows that India received less than $20 billion in FDI in the first six months of 2011, compared to more than $60 billion in China while Brazil and Russia took in $23 billion and $33 billion respectively. Stocks in all four countries have underperformed relative to the broader emerging markets equity index, as well as the markets in the developed nations. Pakistan's KSE-100 has significantly outperformed all BRIC stock markets over the ten years since BRIC was coined. 
Noting India's significant dependence on foreign capital inflows, Jim O'Neill recently raised concern about the potential for current account crisis. "India has the risk of ... if they're not careful, a balance of payments crisis. They shouldn't raise people's hopes of FDI and then in a week say, 'we're only joking'". "India's inability to raise its share of global FDI is very disappointing," he said.
In addition to Jim O'Neill, a range of investment bankers are turning bearish on India. UBS sent out an email headlined "India explodes" to its clients. Deutsche Bank published a report on November 24 entitled, "India's time of reckoning."
"Suddenly everything seems to be coming to a head in India," UBS wrote. "Growth is disappearing, the rupee is in disarray, and inflation is stuck at near-record levels. Investor sentiment has gone from cautious to outright scared."
India's current account deficit swelled to $14.1 billion in its fiscal first quarter, nearly triple the previous quarter's tally. The full-year gap is expected to be around $54 billion.
Its fiscal deficit hit $58.7 billion in the April-to-October period. The government in February projected a deficit equal to 4.6 percent of gross domestic product for the fiscal year ending in March 2012, although the finance minister said on Friday that it would be difficult to hit that target.
As explained in a series of earlier posts here on this blog, India has been relying heavily on portfolio inflows -- foreign purchases of shares and bonds -- as a means of covering its rising current account gap. Those flows are called "hot money" and considered highly unreliable.
Indian policy makers face a significant dilemma. If they do nothing to defend the Indian currency, the downward spiral could make domestic inflation a lot worse than it already is, and spark massive civil unrest. If they intervene in the currency market aggressively by buying up Indian rupee, the RBI's dollar reserves could decline rapidly and trigger the balance of payment crisis Goldman Sachs' O'Neill hinted at.
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1 year ago
6 comments:
riaz jee the INR has been rising this year (Its above 50..49.8 and rising)
Inflation is at a 2 year low
growth holding up at 7%.
FDI and remittances at an all time high.
But yes thanks for your concern!
CAD -remittances-FDI is less than 1% of GDP (this is covered by FX reserves of 300 bn ie 20% of GDP)and the situation is improving.
FII inflow is again on the upswing this month.
Not many major economies these days growing at 7%+.
Anon: "the INR has been rising this year (Its above 50..49.8 and rising)"
Indian Rupees can't buy any imports. The Arabs won't sell oil for any currency other than US $.
The Americans can and do simply print more dollars to buy stuff, and the ECB prints Euros to deal with the European debt crisis.
Indian govt and Indian companies still need US dollars. And Indians can't just print them. They have to rely on the inflows of dollars and Euros.
That's where the problem is.
Unlike China, India does not have trillions of dollars in reserves from China-like huge trade surpluses....India runs huge and growing trade deficits.
http://www.rediff.com/business/slide-show/slide-show-1-india-china-trade-hits-a-record-high/20120130.htm
India-China trade hits a record high
http://www.thedailybeast.com/newsweek/2010/09/18/europe-becomes-china-s-biggest-trade-partner.html
China’s New Best Partner
Let me begin by saying that to save you some embarrassment, I’m going to TRY to not talk about pak on the parameters that you have highlighted – foreign inflows, debt, bail out loans, deficits and of course the usual indices such as growth, inflation, unemployment, currency in free fall, investment, etc.
You have appear to have identified a key that unlocks the answers india’s problem with debt and deficits – Foreign Capital. But the picture is not as bleak as you wish it to be. Hard data reveals that despite the loud rhetoric, with arm-chair analysts quoting Jim o Neill and the likes – Foreign Investors are simply not buying your version of the india story.
“India Explodes” may have caught your imagination, but here’s some raw data to help you gain perspective. Despite the sudden gloom and doom forecasts and sell calls flooding the markets – FII’s were net sellers only to the extent of INR 3642 cr or USD 730 million in equities. (Exchange rate – 1 USD = INR 50). Meanwhile, given the high returns, Indian debt markets have found favour with FIIs pumping in nearly INR 42,600 cr or USD 8.5 billion.
In fact, the new year has cheered the Indian markets– with over USD 2 billion being pumped into equities in Jan, alone, by FIIs.
As for the more stable FDI, despite the loud cries and macro economic headwinds – investors have shown faith with India registering the second highest growth rate in terms of FDI inflows. The latest Ernst and Young report titled “India Attractiveness Survey 2012” highlights how India registered second fastest growth in terms of FDI inflows. A growth rate of 25%, second only to Brazil. It also records how between Jan-Nov 2011, over USD 50 billion was funneled into India.
Also, it would be naïve to blindly associate the “hot money” theory with FIIs in India, without understanding the dynamics of the Indian markets.
The Indian markets lack depth. The result being that the slightest of negative moves by FIIs trip the market, which has dual consequences. The cost of exit increases manifold for the FII. Secondly, the buyers in such markets are hard to find. It’s a default mechanism which keeps “hot” money in check. Renowned journalist, economist, entrepreneur and investor Swaminathan S. Anklesaria Aiyar, explains this using the term “cool money.
Meanwhile, through RBI’s minimalist measures and investors hunting for bargains, the INR has rallied by over 7.4% since hitting lows of 53.75 in Dec. (1USD=INR 49.77on Jan 31 closing). And guess what? Despite your well intended fears – “the RBI's dollar reserves could decline rapidly and trigger the balance of payment crisis”, the reserves are still in pretty good shape.
And India is still on course to achieve 7% growth.
I do think that the Chinese will invest even more money in India than they already have, since India has now become the second largest market for Chinese goods after the USA. This also corresponds with the increasingly lukewarm relations that China has with Pakistan these days - a close friend of mine in India, B Mohanakrishnan, who is a stockbroker and who follows the financial sector, alerted me to this new direction that China has been taking about two or so years ago. At the time, this was only a beginning phenomenon, but what Mohan hinted at has come very true in recent months. I think the Indian government is also making a conscious effort to give lucrative business concessions to the Veto Powers at the UN - the nuclear reactor business to the USA, the commercial goods business to China, the purchase of an aircraft carrier and a nuclear submarine from Russia, the ever growing trade with Britain and yesterday's confirmation of the purchase of 126 fighter aircraft from France are a hint of the future direction of Indian foreign policy.
My only hope is that all of this means that India's increasing dependence on the most powerful nations on earth tames some of the winder thinkers in New Delhi and pushes India and Pakistan into a long lasting peace.
India's budget deficit threatens to explode, according to Bloomberg:
Mumbai: India's budget deficit reached 92.3 per cent of the fiscal-year target in the nine months through December, imperilling the government's aim of reining in the gap.
The deficit was Rs3.8 trillion (Dh282 billion) in the period, the Controller General of Accounts said on its website yesterday. The shortfall was 44.9 per cent of the annual objective in the same period a year earlier.
Finance Minister Pranab Mukherjee has said cutting the deficit is a "serious challenge" and Standard Chartered Plc has predicted India will miss its target of lowering the gap to 4.6 per cent of gross domestic product by March. Slowing growth threatens to hurt tax receipts even as subsidies spur spending and the government struggles to sell stakes in companies it owns.
"The fiscal slippage this year will be substantial," Shubhada Rao, Mumbai-based chief economist at Yes Bank Ltd, said before the release. "As the economy slows, revenue collections are also getting hit."
The yield on the 8.79 per cent bonds due in Nov-ember 2021 fell two basis points, or 0.02 percentage point, to 8.26 per cent in Mumbai yesterday. The rupee strengthened 0.6 per cent to 49.3675 per dollar, while the BSE India Sensitive Index of stocks, which lost about a quarter of its value in 2011, climbed 1.2 per cent.
Bonds rose after Subir Gokarn, deputy governor of the Reserve Bank of India, said in New Delhi that the central bank may consider more government debt purchases if a cash squeeze fails to ease.
Reserve ratio
The Reserve Bank on January 24 lowered the amount of deposits lenders need to set aside as reserves for the first time since 2009 and signalled future interest-rate cuts, moving to shield growth from the impact of Eur-ope's debt crisis. The reserve-ratio reduction was effective January 28.
Overnight interest rates remain elevated even after the reduction in the cash reserve ratio, indicating liquidity pressures are persisting, Gokarn said.
"Based on that, obviously, we will consider" open-market operations, he said, referring to bond purchases. The possibility of another reserve-ratio cut at the mid-quarter monetary policy review also remains on the table, he said. The Reserve Bank also said last week that inflationary threats make it "premature" to start lowering its repurchase rate, adding that without "credible fiscal consolidation" its scope to cut rates will be constrained.
It left the benchmark at 8.5 per cent for a second month at the January review. Indian inflation was 7.47 per cent in December, a two-year low, while remaining the fastest among the Bric (Brazil, Russia, India and China) nations.
http://gulfnews.com/business/economy/india-39-s-deficit-threatens-to-explode-1.974039
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