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India’s boldest attempt yet to stem a rout in the rupee delivered only a modest lift in the currency but sent bond and stock prices tumbling yesterday, sparking concern that the unexpected measures inflict too much pain for limited gain.
Late on Monday, the Reserve Bank of India raised short-term borrowing costs, restricted funds banks could access and said it would drain cash from the market via a Rs120bn ($2bn) bond sale as it sought to create demand for the rupee, which hit a record low last week. The bank raised the marginal standing facility rate and the bank rate to 10.25% from 8.25%, according to a statement on its website.
The steps make it harder to speculate in the rupee and are intended to attract foreign inflows needed to fund a record current account deficit, but markets were not convinced. “The best case or what we are all hoping for is that these are short term measures purely to drive home a point, that it does not endanger growth in the long term,” said Ananth Narayan, co-head of wholesale banking for South Asia at Standard Chartered Bank.
While the central bank stopped short of an outright policy rate hike, its moves will still raise funding costs for firms that are already facing the slowest economic growth in a decade.
“These measures are intended to quell speculation or excessive speculation in the forex market, trying to reduce volatility in forex market,” Finance Minister P Chidambaram said.
“These measures should not be read as a prelude to any policy rate changes,” he said.
The rupee gained to 59.43/44 per dollar from a close of 59.89/90. Last week, it fell to a record low of 61.21 and is down nearly 10% since the start of May, the worst showing among emerging Asian currencies tracked by Reuters.
“The central bank, presumably reluctant to use up too many foreign exchange reserves, clearly felt it had to show a stronger intent to put a floor under the rupee,” Credit Suisse economist Robert Prior-Wandesforde wrote in a note.
Regulators have also tried to clamp down on speculative trading by focusing on onshore derivative markets.
The RBI has been reluctant to intervene aggressively in the market by dipping into foreign currency reserves that cover nearly 7 months of imports, as any rundown of these holdings could further erode foreign investor confidence. “These measures do little to address the structural issues that have caused the rupee to underperform versus the rest of the region in 2013. Although the current account deficit has narrowed, it is still sizable and provides an enduring demand for US dollars onshore,” HSBC analysts said in a note.
Bank of America-Merrill Lynch cut its GDP forecast for Asia’s third-largest economy to 5.5% from 5.8% for the fiscal year that ends in March 2014.
It also cut its forecast for further official interest rate cuts in 2013/14 to 50 basis points from 75 basis points.
The government is preparing measures to open up more sectors such as defence for foreign investors, in measures similar to the ones taken in September when the country further opened up its retail and aviation sectors.
The yield on the 8.15% bonds due June 2022 jumped 52 basis points, or 0.52% point, to 8.2%, according to the central bank’s trading system. That is the biggest yield increase for a benchmark 10-year security since January 2009. The S&P BSE Sensex share index declined 0.9% to 19,851.23. “The RBI’s announcement overnight will make it more expensive to short the rupee,” said Khoon Goh, a senior strategist at Australia & New Zealand Banking Group in Singapore, referring to bets that the currency will decline. “While I expect the rupee to gain a temporary reprieve, depreciation pressure will re-emerge if the economic fundamentals don’t improve in the near term.”
The carry costs of holding long-dollar positions will increase “significantly,” analysts at HSBC Holdings, including Dominic Bunning in Hong Kong, wrote in a research report today. Foreign-exchange implied yields have rarely exceeded 10%, they wrote.
The price of contracts that fix the conversion rate for buying dollars with rupees in a year’s time jumped 111 basis points today to an annualised 7.49% over the spot rate, data compiled by Bloomberg show. The onshore forward premium on the dollar has risen 183 basis points in the past year.
Three-month onshore rupee forwards rose 0.6% to 60.47 per dollar, data compiled by Bloomberg show. Offshore non- deliverable contracts rose 1.1% to 60.39.
The spread between the one-month and 12-month NDFs rose to 395 pips, the highest level since 2008. A pip is the smallest unit of a currency’s price, which in US dollar terms equals one-hundredth of a cent.
The central bank said it will “continue to closely monitor the markets, the liquidity situation and the macroeconomic developments and will take such other measures as may be necessary, consistent with the growth-inflation dynamics and macroeconomic stability.”
“Some more decisions” are “on the anvil,” Chidambaram said yesterday.
The S&P BSE Sensex slid 0.9% to 19,851.23 at the close in Mumbai, halting three days of gains. ICICI Bank plunged the most since February 2011, leading its peers lower. The S&P BSE Bankex, a measure of 13 lenders, sank 4.8%, the most since July 2009. Carmaker Maruti Suzuki India fell 2.4%, a record 11th day of losses.
ICICI Bank, the nation’s second-biggest lender by market value, tumbled 5.4% to Rs1,003.45, the most since February 24, 2011. State Bank of India, the largest by assets, lost 4.4% to Rs1,827.65, the lowest close since January 16. HDFC Bank, the biggest lender by value, dropped 2.4% to Rs678.7.
Mortgage lender Housing Development Finance Corp slumped 3.8% to Rs816.05. The S&P BSE Bankex plunged the most among the 13 sector indexes compiled by the BSE.
Some company loans may turn bad faster than expected after the RBI’s moves, hurting banks with high loan-deposit ratios, Credit Suisse Group AG analysts led by Ashish Gupta wrote in a report yesterday. IndusInd Bank and Yes Bank, which are not part of the Sensex, will be the worst affected, they wrote.
“Lenders will now have to raise deposit rates or borrow funds from money markets at higher rates,” Vishal Narnolia, a Mumbai-based banking analyst with SMC Global Securities Ltd, said by telephone. “The higher cost of funds cannot be fully passed on, as lending growth is already at a three-year low.”
Credit Suisse cut IndusInd Bank’s share-price estimate 11% to Rs416. The stock plunged 7.9% to Rs466.40, the sharpest fall since July 2009.
Maruti Suzuki retreated 2.4% to Rs1,411.25, a three-month low. Hero MotoCorp, the biggest two-wheeler maker, lost 1.9% to Rs1,692.35. Mahindra & Mahindra slid 1.6% to Rs913.5. High interest rates can reduce automobile sales in a country where almost 80% of vehicle purchases are funded through loans.
The rupee gained 1% to 59.315 per dollar at the 5 pm close. The currency, which touched a record low of 61.2125 on July 8 after the US signaled it may reduce stimulus this year, climbed as high as 59.1250, the highest level since July 1. The yield on 8.15% bonds due June 2022 soared 52 basis points to 8.2%, the most since January 2009.
RBI Governor Duvvuri Subbarao kept the repurchase rate, the policy benchmark, at 7.25% in June, ending a run of three cuts. The policy next review is on July 30.
Cigarette maker ITC surged 2.1% to Rs360.05, an all-time high. Shares of Hindustan Unilever and Sun Pharmaceuticals Industries increased to Rs623.1 and Rs1,119.5, both records. Tata Consultancy Services climbed 0.5% to Rs1,649.35, a life-time high. “Markets are seeing value in companies that are cash-rich and have low debt on their books as they will be least impacted by the tightening measures,” Unicon’s Nagpal said.
ITC had a total debt of Rs1.02bn, Sun Pharma Rs1.98bn, Tata Consultancy Rs3.32bn and Hindustan Unilever Rs247.4mn as of March 31, data compiled by Bloomberg show. That compares with a median Rs195bn for the 30 Sensex companies, the data show.
The Sensex has gained 2.2% this year and trades at 13.3 times projected 12-month earnings. That compares with the MSCI Emerging Markets Index’s 10 times. Global investors sold $29.5mn of domestic shares on July 15, paring this year’s inflows to $12.4bn, data from the market regulator show. They sold $1.8bn in June, the most since August 2011, the data show.
The CNX Nifty Index on the National Stock Exchange of India lost 1.3% to 5,955.25.