MUMBAI: India’s move to relax overseas debt curbs for firms and allow foreigners to buy more local debt is not likely to provide the weakening rupee the kind of support it needs as underlying economic conditions worsen.
By opening up to more capital inflows, policymakers hope to take some pressure off the rupee, which has fallen more than 7% this year, and help control inflation. Analysts say the move is unlikely to result in a flood of inflows as global market turmoil and the risk of a widening budget deficit dulls the lure of Indian debt, and slowing growth and rising inflation are longer-term weights on the rupee.
“It won’t make a huge difference. The move is largely symbolic and shows the central bank is increasingly worried with the rupee’s continued weakness,” said Robert Prior-Wandesforde, an economist at HSBC in Singapore.
India raised foreign investment limits in government and corporate debt to $5 billion and $3 billion, respectively, from $3.2 billion and $1.5 billion, and allowed firms to borrow up to $100 million abroad and repatriate the funds, from $20 million earlier.
That was a turnaround from nine months ago, when authorities clamped down on offshore borrowing by firms to try and rein in the rupee as it rallied to its strongest in nearly a decade.
It was also a shift in the RBI’s currency policy, now looking to guard against sharp rupee weakness having bought almost $100 billion in the 15 months since the start of 2007 trying to contain it.
“A FX policy that is weakening the currency is, over time, inconsistent with an overall policy regime that is seeking to curb inflationary pressures,” HSBC’s Wandesforde said.
The rupee was trading around 42.6 per dollar on Wednesday, stronger than a 13-month low of 43.21 per dollar hit in May but well below last year’s close of 39.41.
Calyon expects the rupee to fall as low as 44 per dollar by September due to growing risk aversion, deteriorating balance of payments and rising political uncertainty. The rupee last traded at 44 per dollar in March 2007.
Annual inflation hit a 3-12-year peak of 8.1% in mid-May, above the central bank’s comfort-zone of 5.5%, and an expected increase in state-set fuel prices, expected to be announced on Wednesday, may push it closer to double digits.
According to HSBC, oil prices in rupee terms have risen 46% since April 1. Oil is India’s biggest import item, and record global prices have upped demand for dollars from refiners and raised worries about a widening trade deficit, a negative for the rupee.
“(As long as) oil prices remain elevated, inflation remains high and there are concerns on growth, the rupee will continue to remain on a weak wicket,” said Shuchita Mehta, economist at Standard Chartered Bank.
