Thursday, December 9, 2021

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. 

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.


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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22 comments:

Riaz Haq said...

Funds Shun #India Turning #India #Rupee Into EM Asia’s Worst Currency. #INR declined 1.9% this quarter as global funds pulled $4.2 billion of capital out of India’s #StockMarket, the most among regional markets where data is available. #Modi #BJP #Hindutva https://www.bloomberg.com/news/articles/2021-12-21/global-funds-shunning-india-turns-rupee-into-worst-asia-currency

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.

samir sardana said...

The reason Y USD cones to India,is the gravitational law,of interest differentials.

Fx surpluses in US and EU,with States and funds,look for places,to park debt.Soverign risk is in US T-bills or USPR,so the funds start shopping for nations,with the highest soverign rating - which subsumes all risks.

So in that pecking order,India comes at 6 or 7,as it HAS SCALE.There are many other nations, with a HIGHER rating,BUT THEY ARE RICH NATIONS,who will offer close to USPR,and whose currencies will move, with large USD inflows.

INDIA NEEDS MONEY FOR INFRA ETC.
INDIA NEEDS USD DEBT FLOWS FOR MANAGING THE INR
IT HAS A LARGE DEBT MARKET
AND SO,IT CAN OFFER RATES MUCH MIGHER THAN USPR,WITH SOME CAPITAL PROTECTION AND SOME LOCK IN.

FOR US AND EU - PRC AND RUSSIA HAS POLITICAL RISK - WHICH IS NOT THERE IN INDIA - AS INDIANS ARE LAPDOGS OF THE US AND EU.HENCE,CAPITAL RISK IS ZERO !

INDIA GAINS BY USD DEBT,AS IT LENDS PACKING CREDIT,FCNR AND INFRA DEBT IN USD,TO LOWER THE COST OF CAPITAL,TO INDIAN EXPORTERS AND DEEMED EXPORTERS.

THEREFORE,THEY CAN SHARE THE GAINS,WITH THE USD DEBT HOLDERS,AND OFFER MUCH HIGHER RATES,AT THE SAME LEVEL OF SOVERIGN RISK.

ALL THE USD DEBT,IS FLOATING RATE DEBT,LINKED TO LIBOR OR USPR - AND THE COST WILL RISE, WITH US FED RATE HIKES - AND THAT IS WHEN INDIA WILL NEED MORE USD DEBT - AS COVID WILL DESTROY GROWTH,AND OIL PRICES WILL NOT FALL,AND THE WORLD IS DUE,FOR A FOOD AND FERTILISER SHOCK.dindooohindoo

IN THAT SCENARIO - WHEN INDIANS NEED MORE USD DEBT - WILL THE INVESTORS LEND - THAT IS THE QUESTION !

OR WHEN PLAF JF-35s,LAND ON THE ROADS OF THE RASHTRAPATI BHAWAN.

Riaz Haq said...

#India's #forex #reserves slide for fourth straight week amid decline in currency assets.Falling forex reserves may cause issues for #Modi government and the Reserve Bank in managing the nation’s external and internal financial issues. https://indianexpress.com/article/business/market/forex-reserves-slide-for-fourth-week-7690545/ via @IndianExpress

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

Riaz Haq said...

#India’s current account deficit grows as #trade gap widens in Q3. Net foreign portfolio #investment fell to $3.9 billion from $7 billion a year ago; net #FDI inflows at $9.5 billion, down from $24.4 billion a year ago.#Modi #BJP #Hindutva #Islamophobia

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

Riaz Haq said...

#India to borrow $200.7 billion to finance #deficit in $530 billion budget. A #Mumbai trader said India government #bonds are facing a double whammy. Without any support, the yields (#interestrates) are set to jump to 6.95% to 7% in coming days. #COVID https://finance.yahoo.com/news/bonds-tumble-india-record-government-080144551.html

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.

Riaz Haq said...

Chitra Ramkrishna, #India's $4 trillion #StockMarket #NSE CEO, let a faceless #Hindu conman ‘yogi’ make all key decisions. For all this, SEBI’s punishment to Ramkrishna is paltry. She has now been barred from capital markets for three years. #Modi #BJP https://www.thehindubusinessline.com/markets/stock-markets/inside-the-mind-of-chitra-ramkrishna-she-took-guidance-from-an-unknown-himalayan-yogi-to-run-nse/article65037214.ece

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?”

Riaz Haq said...

#Mumbai #FII Exodus: Foreign investors selling #Indian shares at a rate of $1 billion a day as #India's stocks plummet. Pace picks up after a record $2.9 billion withdrawn last week. #Modi #BJP #Hindutva #economy #Russia #Ukraine https://www.bloomberg.com/news/articles/2022-03-10/a-billion-dollars-a-day-global-funds-keep-selling-india-stocks

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.

Riaz Haq said...

#India's Monthly #Trade #Deficit Widened in February to $20.88 billion from $13.12 billion deficit in the same month a year earlier. India, #Asia's third-largest economy, has been running a significant trade deficit for more than 15 years. https://www.marketwatch.com/story/india-s-trade-deficit-widened-on-year-in-february-271647274422?reflink=mw_share_twitter

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.


Riaz Haq said...

#India losing foreign #investors with $15 billion of equity outflows YTD in India already in 2022....India’s inclusion into the GBI-EM Global Diversified #Bond Index in Q4-2022 unlikely. #FPI #FDI #Modi #Debt https://www.business-standard.com/article/markets/godman-sachs-cuts-2022-fpi-flow-projection-to-india-by-over-80-to-5-bn-122033000854_1.html

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.

Riaz Haq said...

#India's emerging twin #deficit problem: Rising fiscal deficit & growing trade deficit. If unchecked, both deficits could cause a serious #economic crisis, including Balance of Payments crisis. #poverty #unemployment #hunger #Modi #BJP https://indianexpress.com/article/explained/everyday-explainers/indias-emerging-twin-deficit-problem-explained-7982895/ via @IndianExpress

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.

Riaz Haq said...

#Indian Stock market in bear territory. Its value is already down nearly 20% from its January peak of about $3.7 trillion. Foreign investors have been selling Indian stocks at a record pace, withdrawing about $32 billion since September 2021. #Modi #BJP https://www.business-standard.com/article/markets/three-charts-show-trouble-for-indian-stocks-nearing-a-bear-market-122062400158_1.html

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.

Riaz Haq said...

Explained: What FPIs’ market exit means
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.

---------------

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


Riaz Haq said...

Foreign #investors flee #India, putting pressure on #Indian #currency. #Modi government raises #import taxes on #gold to preserve #forex reserves, support #INR, amid rising #inflation and twin current account and fiscal deficits. #BJP #Hindutva #economy
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.

Riaz Haq said...

Foreign #investors flee #India, putting pressure on #Indian #currency. #Modi government raises #import taxes on #gold to preserve #forex reserves, support #INR, amid rising #inflation and twin current account and fiscal deficits. #BJP #Hindutva #economy
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.

Riaz Haq said...

#India Hit By Emerging Market #Investor #Exodus As #India #Rupee Tumbles. Investors reeling from the brutal emerging markets selloff over the past six months again fled the rupee as India's currency hit new lows. #Modi #BJP #Hindutva #economy https://www.ndtv.com/business/indian-economy-hit-by-selloff-in-emerging-markets-as-rupee-slumps-3124850

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.

Riaz Haq said...

#India Hit By Emerging Market #Investor #Exodus As #India #Rupee Tumbles. Investors reeling from the brutal emerging markets selloff over the past six months again fled the rupee as India's currency hit new lows. #Modi #BJP #Hindutva #economy https://www.ndtv.com/business/indian-economy-hit-by-selloff-in-emerging-markets-as-rupee-slumps-3124850

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.”

Riaz Haq said...

Are India’s forex reserves adequate?

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”.

Riaz Haq said...

India's trade deficit at record high of $25.63 billion in June

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.

Riaz Haq said...

#India announces measures to boost #forex inflows to staunch #Indian currency’s recent fall to record lows. #RBI raises borrowing limit for companies to $1.5 billion. Move comes after #India #rupee tested record lows. #BJP #Modi #Hindutva https://www.bloomberg.com/news/articles/2022-07-06/india-relaxes-rules-to-boost-foreign-inflows-stem-rupee-fall via @markets

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.

Riaz Haq said...

Indian rupee may face more heat as repayments worth $267 bn of $621 bn external debt come up


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."

Riaz Haq said...

#India’s #Trade #Deficit Widens to Record On Costly Imports, Weak #Rupee. The gap between #exports and #imports widened to $31.02 billion in July, from $26.18 billion in June. #Modi #BJP #Economy #Inflation #Currency #Forex https://www.bloomberg.com/news/articles/2022-08-02/india-s-trade-gap-widens-to-record-on-costly-imports-weak-rupee#xj4y7vzkg

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.

Riaz Haq said...

Record #trade deficit adds to #India's external balance challenges, #Indian currency woes. QuantEco Research revised their CAD projections for India higher for the current fiscal year to $130 billion from $105 billion. #Forex #INRUSD #economy #deficit https://www.reuters.com/world/india/record-trade-deficit-adds-indias-external-balance-challenges-rupee-woes-2022-08-03/

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".