Pacific Money

Is India Swimming Naked?

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Pacific Money

Is India Swimming Naked?

Adverse global trends, especially with oil prices, could exacerbate an already precarious economic position.

In a chairman’s letter from Berkshire Hathaway more than ten years ago, renowned investor celebrity Warren Buffet wrote that you can only find out who is swimming naked when the tide goes out.  Tension in the Middle East or, as economists might put it, rising oil prices are now conspiring to make things just that little bit harder.

The tide of liquidity released across the globe as central banks, led by the US Federal Reserve, undertook “quantitative easing” through asset purchasing programmes, is in the process of going out.  As if following a script written by those economists who argue that emerging market crises are more often than not the result of volatile financial flows, the turning of the tide has indeed created difficult conditions across many high-performing economies.

As Pacific Money has been covering, Southeast Asia, especially Thailand and Indonesia are being buffeted by bad economic news and worrying conditions. These difficulties are showing up in numerous emerging markets around the world, but it is in India where the situation is most dire.

This week the Indian currency has again been setting disturbing records, at least for anyone with “long” rupee positions. These include not only more record lows against the U.S. dollar, but on Wednesday also a dramatic drop which was the worst one day sell off almost twenty years.

Whilst Syria might be geographically far from India, the apparent turn towards a strike on Assad’s regime by a U.S. led coalition, and also the feared regional destabilization such a strike could ferment is not helping the situation in the subcontinent.  Oil prices have increased in line with U.S., European and Saudi rhetoric, and this is very bad news for India, whose current account deficit is one of the main complicating factors pushing investors for the exits. Current account deficits are only helped by currency devaluation if the imports are not necessary (or replaceable), but India’s reliance on imported oil represents yet another potential complication.

Foreign funds continue to leave the country, but now it is not just bond markets that are seeing foreign outflows (USD $4.6billion this year) but also equity markets (which have lost USD $3.6billion in the last three months). 

The government remains in fire-fighting mode. Proposals now include activating currency swap agreements to ease pressure on the rupee, or policy changes to reduce the current account deficit through enabling iron ore exports.  More intervention and further selling off of India’s still significant forex reserves can also be expected.

Such high volatility in the currency is of course already damaging the business environment. Fears about the need for interest rate increases to defend the currency complicate corporate financial planning, whilst rapidly rising import costs for raw materials make pricing, budgeting and business strategy a nightmare.

The rupee’s difficulties continue. 

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