The series of measures announced by the government to check rupee’s slide and bring down the current account deficit are a market positive, but one would do well to wait for more clarity to emerge, caution analysts.
On Friday, the government bit the bullet as it decided to rein in non-essential imports and boost exports, apart from unveiling a 5-pronged strategy to shore up the economy.
The five steps announced followed a meeting chaired by Prime Minister Narendra Modi to take stock of the state of the economy. These include scrapping withholding tax on masala bonds — rupee-denominated debt sold overseas — and relaxations in the overseas debt regime.
“The moves will help the rupee open stronger on Monday, but we need more details on which non-essential items are being considered,” Aditi Nayar, Principal Economist, ICRA, told ET.
Jayesh Mehta, MD, Bank of America Merrill Lynch, agrees. “These measures are enablers to check the rupee’s slide. Overseas investment in debt securities is likely to rise over a period of time after the government proposed to remove caps, introduced earlier in April. Such measures would lift the markets on Monday,” he said.
But Abheek Barua, Chief Economist, HDFC Bank, is a bit guarded in his response. He sees an uptick in fortunes provided the emerging market ship sails smoothly.
“The capital account measures announced on Friday are unlikely to result in any significant shift in fund flows in the immediate future. These measures are better suited when sentiment in the global market is positive towards emerging markets and in general, when it is relatively easy for emerging market corporates to raise money abroad,” Barua told ET.
He offered a perspective, saying the demand for masala bonds from offshore investors is generally driven by the stability of the rupee. “In an environment when the rupee is under pressure, foreign investors would not be much willing to increase the portfolio of rupee denominated assets (unlikely to bet further on the rupee),” Barua explained, calling for a wait-and watch approach.
He even termed it as potential negative for the currency beyond the very near term as “protectionist gestures are viewed with some caution by global investors as it gives the impression of a reversal of reforms”.
Department of Economic Affairs Secretary Subhash Garg is confident that the string of measures will lead to dollar inflows to the tune of $8-10 billion into the country.
According to Barua, a lot would depend on how quickly and easily Indian corporates are able to garner additional short-term debt through ECBs or portfolio investments. “We believe that giving additional exposure limits to FIIs might not be much helpful when they are already pulling out money from the Indian markets,” he added.
Ajay Marwaha, Director for investments at Sun Global Investments in London, observed that masala bonds will regain momentum as a key financing instrument to fuel India’s growth.
Source: Economic Times