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| Source: Bloomberg,RBI |
Easy Come, Easy Go
From all accounts, the global credit and financial crisis is going to get worse before it gets better. As the global financial crisis deepens, FIIs may end up taking out more than the $12 billion that they have taken out of our stockmarkets so far.
That means the likelihood of large outflows as FIIs liquidate more holdings to meet cash requirements in their home markets; we have already seen how the draining of $12 billion has impacted the domestic money markets. Add to that another potential outflow: debt repayment.
Corporate India has about $62 billion outstanding in external commercial borrowings (ECBs), starting from 2002 (including foreign currency convertible bonds, or FCCBs). Many companies will be faced with having to repay those loans, about 20-25 per cent of which is estimated to fall due this year.
That means another $12-15 billion will likely go out in the next few months. Indian stockmarkets have also crashed like so many others in the region, so holders of FCCBs are unlikely to convert debt into equity when the strike price is so much higher than the price on the bourses.
“And in today’s scenario, raising more ECBs is going to be extremely difficult,” says Moses Harding, head of the global markets group at IndusInd Bank in Mumbai. “Which means that despite the liberalisation of ECB norms by the RBI, most of that money is unlikely to return.”
Managing More Than Just Liquidity
But despite that, DCB’s Krishnamurthy feels the forex reserves position is comfortable. Harding, on the other hand, points out that the quality of the reserves matters in today’s circumstances, when FII money — there’s still $100 billion of that invested in the markets —and ECBs account for the bulk of our reserves.
From July 2006 to March 2008, accretion to foreign exchange reserves grew very rapidly; but from April to June 2008, addition dropped alarmingly (see ‘FIIs in Heavy Outflow Mode’). Reserves management then was about managing the demand side of capital flows: discouraging them, while trying to get the best return without compromising their safety or liquidity.
The RBI intervened in the markets to prevent the currency from appreciating too much. In the last few weeks, the purpose of RBI’s intervention has been to prevent it from depreciating too much. Now, it is all about managing the supply side of capital — making sure we have enough.
What about liquidity management? Recent events have also demonstrated the market’s ability to absorb large infusions of money, and to deal with large withdrawals. Under the present situation, if another $60 billion — through a combination of ECB repayments and FII sales — were to be taken out, it would absorb all the rupees released by cutting CRR to 3 per cent (Rs 1,80,000 crore) and an unwinding on the market stabilisation scheme (MSS) (about Rs 1,25,000 crore) that the RBI used to mop up excess liquidity.
Domestically, that would leave the market where it is: short on domestic liquidity and short of dollar capital that has catalysed much of India’s growth story. On Thursday, just before BW went to press, the finance ministry announced further easing of ECB norms, signalling that restarting capital inflows was on top of the agenda.
Before 1990, foreign exchange reserves accounted for 6-8 per cent of GDP for most countries. Today, they account for close to 30 per cent; East Asian economies built them up as insurance against capital flight, with India following suit. And that is now being flight-tested.
srikanth(dot)srinivas(at)abp(dot)in
(Businessworld Issue 28 Oct -03 Nov 2008)
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