 "RBI's tightening, rupee fall give FIIs sleepless nights")
To make matters worse, the Reserve Bank of India (RBI) has been sending confusing signals on interest rates by announcing bond sales one day, and a buyback the next. Though the rupee has appreciated in the last fortnight, currency strategists say the 28 per cent fall in the rupee between April 30 and August 28 is the worst volatility the rupee has seen in several decades. This has really hurt foreign investments, they add.
Now, FIIs are talking to chief executives, strategists and regulators to get a handle on what to expect. Keki Mistry, vice-chairman and chief executive, HDFC Ltd, says on an average, he speaks to three FIIs a day on the country’s macroeconomic situation and what steps RBI is likely to announce September 20.
| FIVE QUESTIONS FIIs ARE ASKING |
| 1 How long will RBI continue with its liquidity tightening measures? 2 How much more deterioration will balance sheets of banks witness as bad debts continue to pile up? 3 Will a stable political party come to power in 2014 and will it be able to push reforms? 4 How will India cope if crude oil prices rise significantly if a war breaks out in Syria? 5 Will RBI be able to recoup forex reserves through its recent measures as a weak currency is eroding value of FII investments? |
“One real concern FIIs have is how long would RBI continue with its liquidity-tightening measures. The other concern is political — how long the uncertainty will continue,” he says. RBI’s tightening is putting pressure on the banking system, as higher rates would only increase the stress of bad assets. With projects not securing relevant clearances on time, companies across the spectrum — small, mid-level and even large — are unable to complete projects on time. Consequently, their interest expenses are rising, affecting their earnings, cash flows and ability to repay loans. This is a major concern, as substantial FII money has gone into banking stocks.
Since the beginning of September, Macquarie Capital has met about 40 foreign investors in Asia; most were cautious on Indian equities and believed financials would be a tough sector to make money through the next 12 months.
Though large long-only funds continue to remain in large stocks, these investors are visibly frustrated and aren’t looking to sell at current levels. This frustration stems from the diminishing dollar returns. In rupee terms, stocks in the consumers, banking and pharmaceuticals segments look attractive, but the dollar returns on these stocks are abysmal.
Kotak Institutional Equities says Asian Paints’ 17 per cent annualised return from January 1 2011 in rupee terms is reduced to a paltry three per cent dollar return. ITC’s stellar 27 per cent annualised return in rupee terms morphs into a dollar return of a mere 11.5 per cent. If foreigners have to continue investing in India, they should ideally seek a higher required rate of return to offset the negative impact of the rupee depreciation and get the “same”, “earlier” dollar required rate of return, Kotak says. For foreign investors, the cost of capital is rising and they can no longer hope to make high nominal returns from India.
FIIs also want to know how India would cope if crude oil prices rise significantly from the current $110-112 a barrel, as this would put pressure on India’s current account deficit (CAD) and the rupee. India needs to recoup its forex reserves for an eventuality like this. However, the extent to which new RBI governor Raghuram Rajan’s swap facilities and other measures yield results would be evident from November-end. The Centre and RBI, however, have little control on external factors, and these could play havoc in the case of Indian markets. Of these external factors, the most important (apart from crude oil prices) is the US Federal Reserve tapering its bond-buying programme.
Indranil Sen Gupta of Bank of America Merrill Lynch expects RBI to persist with the July 15 tightening into December, unless the US Fed defers tapering on Wednesday. Keki Mistry believes sentiments could turn quickly and if the Fed says it is deferring the tapering or announces a small tapering of about $10 billion, the markets would rise. On the other hand, if the Fed says it would taper bond-buying by $25 billion, the markets would tank. A lot of this is sentiment-driven.