India May See a Repeat of 1991 Crises

Alchemist · #1 5th December 2011, 05:17 PM

As I stated in this post, India's forex reserves are more or less equal to its external debt.

In other words, most of India forex reserves are made up of "borrowed dollars", which haven't been "earned".

China has a large trade surplus and actually "earns" and "owns" its forex reserves.

Even if INR continues to depreciate against the USD, there isn't much that RBI can do about it.

RBI is considering imposing controls on capital outflows, but such moves will do more harm than good in the long-term.

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"Certain restrictions to prevent outflow of foreign exchange are on the table... Restrictions cannot be ruled out if the situation deteriorates further," said one financial ministry official privy to the upcoming meeting's agenda.

Government to weigh restrictions on forex outflows - The Economic Times

India depends on its capital account surplus to balance its current account deficit. If both its capital account and current account turn negative, India could face a serious crisis.

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If Europe's debt troubles deteriorate, India could be hit with a balance of payments crisis as severe as the one that forced a sharp devaluation in 1991.

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India relies heavily on portfolio inflows -- foreign purchases of shares and bonds -- as a means of covering its current account gap. Those flows are fickle.

Re slide: Is India inching closer to worst crisis in decades? - The Economic Times

sudhashbahu · #2 5th December 2011, 07:21 PM

Economic times reports:

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After covering the current account deficit, short-term debt and foreign investment flows, there would be less than $20 billion left over.

Link.

$20 Billion is hardly enough to defend the rupee if there is a serious run on it by speculators.

sudhashbahu · #3 8th December 2011, 01:44 PM

I think our goose is cooked and a repeat is 1991 crisis is highly likely.

Consider the facts:

1. We have a fiscal deficit (government spending is greater than revenue). Given the government's populist policies, this deficit is largely out of control.
2. We have a current account deficit. Considering that our imports are crucial inputs like oil, coal, essential machinery etc. this deficit is largely out of control.
3. Out capital account consists largely of portfolio investments and borrowings but very little FDI. As Alchemist pointed out, even our Reserves are not reliable.

The only long-term solution possible for our country (other than an act of God that gives wisdom to our politician to control fiscal deficit) is to try and balance out the fiscal and current account deficits by the capital account. A key component of this would be to seek FDI.

But FDI is now a bad word.

I see no solution to our problems. If things continue as they are now, a crisis is inevitable.

Alchemist · #4 8th December 2011, 06:06 PM

Quote:

Originally Posted by sudhashbahu

I think our goose is cooked and a repeat is 1991 crisis is highly likely.

Consider the facts:

1. We have a fiscal deficit (government spending is greater than revenue). Given the government's populist policies, this deficit is largely out of control.
2. We have a current account deficit. Considering that our imports are crucial inputs like oil, coal, essential machinery etc. this deficit is largely out of control.

In my opinion, both India's fiscal deficit and inflation are difficult to control.

The root causes of both the problems are the same - government's non-productive populist ("socialist") policies and programs.

The currency market is already warning us of a crisis ahead. Many analysts are predicting levels of 58-59 for the INR in next few weeks.

I also think that the Indian Rupee has a significant downside in the medium-term.

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A further fall in the INR will only make things worse for the economy. Import costs will go through the roof. The government will have no choice but the pass on some of the costs to the people. Rest of the costs will have to be absorbed by the government and that will further widen the fiscal deficit.

Indian markets crashed today and I suspect a few large investors are exiting the Indian markets with an intention to buyback the shares after the INR corrects more.

(Of course if Eurozone leaders find some sort of a temporary solution for the debt problems in the region, these investors will rush back to buy Indian stocks).

I am less worried about the current account deficit. A weaker rupee will be a big boost for exporters and certain types of imports will become unattractive.

Keep an eye on stocks of export-oriented companies. These companies will benefit a lot (in the long-term) from a weaker Rupee.

Going forward, a currency crisis is possible in India, but I don't think it will be as severe as in 1991.

In the last 2 decades a lot of investment has been done in the economy.

India now has a large number of companies that can compete globally - at least in areas where advanced technology is not required.

If the INR falls another 15% from current levels, Indian exporters will be able to compete even with their Chinese counterparts.

As a net exporter of services, I will be more than happy to see a level of Rs 60 for the USD.

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To conclude:

A falling INR will make things miserable for the government and the public as a whole, but will greatly benefit export-oriented businesses.

Alchemist · #5 9th December 2011, 06:08 PM

The government has now revised upwards India's FY 2012 trade deficit (first 6 months) by nearly 10% because of mis-classifications, double counting, computer software issues and "all sorts of things".

Quote:

"Every damn number for the last eight months has been revised...," Commerce Secretary Rahul Khullar said, conceding the crucial balance of trade deficit was also kept undervalued at USD 107 billion instead of USD 117 billion.

There was not only mis-classifications but also "error in double counting and all sorts of things" due to problems in the computer software which was recently upgraded, he said.

Government admits it goofed up export data - The Economic Times

Alchemist · #6 14th December 2011, 04:09 PM

Some of the articles that I have come across in last couple of days:

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Worries that India's evolution into an economic superpower may be overhyped and signs the government may lack the will to further dismantle a protectionist legacy drove India-themed funds to the bottom of performance league tables in November.

Growth disappointments drag funds down in Nov - Yahoo! India Finance

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The state of the rupee reflects the fading international investors' interest in India.

Rupee fall: India Inc calls for RBI's help to check impact of wild swings on earnings - The Economic Times

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Initially unwilling to dismiss the India story, global media is turning strident, in line with global banks. UBS recently said about India, "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 Story: Coming to a halt - Moneylife Personal Finance site and magazine

The worst part is that India's financial markets haven't seen any big FII selling and still the INR has been battered.

I wonder what will happen to the INR if FIIs rush to exit for some reason.

man4urheart · #7 19th December 2011, 10:51 PM

Apart from 300 billion currency war chest to handle rupee fall, RBI also has "gold" and "silver" right, which none of analyst is counting on?

Alchemist · #8 20th December 2011, 08:10 AM

Quote:

Originally Posted by man4urheart

Apart from 300 billion currency war chest to handle rupee fall, RBI also has "gold" and "silver" right, which none of analyst is counting on?

RBI's "foreign exchange reserves" includes gold. RBI has only $28 billion worth of gold.

Details about India's forex reserves are available here:

Reserve Bank of India

kris_mar · #9 28th December 2011, 03:47 PM

Cash-strapped govt's borrowing to overshoot target: Drabu - Moneycontrol.com

Alchemist · #10 28th December 2011, 06:52 PM

Quote:

Originally Posted by kris_mar

Cash-strapped govt's borrowing to overshoot target: Drabu - Moneycontrol.com

According to Dr Haseeb Drabu, India's fiscal position is as bad as it was in 1991.

India has failed to take advantage of two decades of strong growth to improve its fiscal position.

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I would take it back to 1991 interestingly, at that point when this whole reform program was started and we were looking at numbers of around 10% of GDP as fiscal deficit though growth in GDP is way better now than it was earlier. If you add the states and the central fiscal today, you are pretty much the number what you were in 1991. So you are going back after 20 years to the same set of figures that you started off with.

The only difference probably is that at that point before that large chunk of fiscal deficit used to be monetized and now that monetization is not there because it’s now relinked. Otherwise in terms of the overall borrowing, I don’t think the fiscal correction had started then has had any results when you look back at it from today’s point of view.

Prudent_Investor · #11 28th December 2011, 06:59 PM

The Govt action on the divestment front, by monetizing assets of SUUTI worth some 35,000 crores can ease the fiscal burden. Ministry expects some 20,000 Crores contribution from this front.

Also, since BSNL is giving up BWA spectrum in many circles, the DOT is planning the auction of another pan India license for BWA, which may also fetch considerable sum.

Alchemist · #12 30th December 2011, 01:19 PM

According to media reports, RBI has sold dollars on Wednesday and Thursday to keep the dollar at around 53.

It might do the same today.

Asian economies paid a heavy price for trying to control depreciation of their respective currencies in 1997 (Asian Financial Crisis).

RBI should not repeat the same mistake and let the currencies take their natural direction.

Quote:

The rupee ended steady on Thursday, recovering from the day's lows on suspected central bank intervention and dollar-selling by nationalised banks for a second day in a row, but the local unit remains vulnerable in the near term.

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"Again I think intervention has happened as the spot moved down by about 35 paisa in the last 15 minutes of trade," said Hemal Doshi, chief financial strategist at Geojit Comtrade.

Note the sharp fall in USD against the INR just before the end of trading session on Wednesday and Thursday.