Recently I had the honour of discussing the future of the UK-India relationship with MP's at the Houses of Parliament and in particular the Indian rupee. At time of writing the INR has depreciated more than 10% since the beginning of the year and is making headlines, especially after falling below the psychological mark of 70 against the dollar. India is stable in terms of depth of the market, savings and consumer profile. But, the uncertainty caused by the US protectionism backed with high US interest rates, high global oil prices and lower capital flows, has hastened the fall of the rupee against dollar in the recent past. The ongoing depreciation of the rupee is set to make borrowings in foreign currency expensive for corporate India and impact bottom lines. Analysts say corporate houses will have to absorb this rise in costs, given limited borrowing opportunities in the domestic market.
And therein lies the rub. The country needs external capital and equity is easier than debt as there is precious little debt market. Of the $25bn in investment only about 10% of it is FDI. INDIA Plc is so conservative it doesn't allow products to flourish. Caps on debt mean that Masala Bonds are good but Rupee denominated debt would be far better. Currently this is very difficult to achieve. Thrown in an election next year. Where normally the INR will decline into a complex domestic market where there are two camps.
Those who are hedged and those who are not. Carry flows mask the real economic situation and in-fighting between Govt and the RBI where intervention is seen as a drain on resources create a complex plot.
In 2013 Morgan Stanley had coined an acronym, the ‘Fragile Five’ which had Brazil, Indonesia, India, South Africa and Turkey as it’s members. The common factor among all these countries were; all of them were dependent on external borrowings and had twin deficits. Is this a repeat of 2013 or is the rupee fall of 2018 different? and should we be worried about the depreciation in the rupee and its impact on the economy? If I had to watch one thing. It would be the importance of oil from Tehran. Politically difficult on the world stage especially when Iran no longer wants to be paid in Rupee. But $600m a day in oil related trades is one signal in a sea of confusing information points. The spice import level on the other hand. Had everyone room up in arms. How can this be?