Crude prices

Rupee Falls 22 Paise, Likely to Fall Further Today

Reports have cited domestic equities, elevated crude oil prices, and foreign fund outflows.

New Delhi: The Indian rupee has fallen for three straight days and is poised to fall further today.

Reuters reports that this is due to a steady rise in US Treasury yields. Concerns over supply have pushed the dollar index to the highest in two weeks, it says.

The rupee settled 22 paise lower on May 29, at 83.40 against the US dollar.

Business Standard has cited domestic equities, elevated crude oil prices, and foreign fund outflows. Importers’ demands and oil companies have also played a role.

A forex trader at a bank told Reuters that it is likely that the rupee will get a new range once the election results are out. Results to the Lok Sabha elections will be declared on June 4. Exit polls will be out on the evening of June 1.

However, fresh foreign inflows in FPIs and bond markets may support the rupee at lower levels, Business Standard said.

Rupee Falls Most in a Month Due to Stronger Dollar and Surging Crude Oil Prices

Crude oil prices have touched a 10-month high as Russia and Saudi Arabia have extended supply cuts to the end of the year.

New Delhi: The rupee experienced its highest monthly depreciation due to a stronger US dollar and a substantial surge in crude oil prices.

The rupee fell by 29 paise to end at Rs 83.04 against the dollar on Tuesday, according to data from Bloomberg. Similarly, it had fallen by 33 paise on August 2.

“This depreciation can be attributed to the overall strength of the US dollar and a significant increase in crude oil prices, which surged by more than 10% to reach $85 per barrel,” Jateen Trivedi, VP research analyst, LKP Securities, told the Financial Express.

Crude oil prices have touched a 10-month high as Russia and Saudi Arabia have extended supply cuts to the end of the year.

When the rupee depreciates, its purchasing power in other countries decreases. Consequently, this leads to higher costs for imported goods and services, making them more expensive for consumers in the domestic market.

India imports over 80% of its crude oil, and the falling rupee’s biggest impact is on inflation.

On Tuesday, September 5, the Indian rupee declined by 0.4%, while the dollar index rose by the same quantum. Apart from anticipated dollar outflows, analysts told the business daily that the rupee’s drop could be attributed to the ongoing weakness observed in Asian currencies.

“China’s slow performance is prompting new concerns about the country’s economic growth. The Caixin service PMI data from the Chinese economy, issued on Tuesday, was lower than the previous month, thereby putting pressure on Asian currency markets,” Nirpendra Yadav, senior commodity research analyst, Swastika Investmart, told FE.

“The rise in the dollar index indicates expectations of an impending interest rate hike, and this is impacting currency markets, including the rupee,” Trivedi told the newspaper.

Analysts said that the movement of the rupee will be influenced by Federal Reserve’s meeting, which is scheduled for later this month.

The Strategic Implications for India as US Pushes for Oil Price Cap, More Output

India requires five million barrels of oil per day, and so, it must continue to look out for the best discounted deals it can get, as per prevailing global rules.

After the pandemic, which roiled commodity markets, the oil market staged a remarkable recovery. Following a growth of around 5.7 million barrels per day (bpd) in 2021, demand was on a course to exceed pre-pandemic volumes and average more than 100 million bpd for 2022. But the second quarter of 2022 has been hit by geopolitical tensions and mounting economic pressures, a surge in inflation, and global supply chain gridlock.

The Russia-Ukraine war continues to intensify with no signs of de-escalation. Inflation continues to be at multi-decadal highs across many economies globally, raising the spectre of a recession in some parts of the world. This week crude prices fell more than 3% with both Brent and WTI crude currently trading at sub-$100/bbl. In the midst of weaker demand for energy, the American priority is lower gas and oil prices and increased OPEC Plus output.

In order to limit Russia’s oil revenues, and to prevent an economically catastrophic increase in oil prices as European sanctions against Russia are set to take effect at the end of this year, the US also wants to put a cap on Russia’s oil prices between $40 and about $60 a barrel. US treasury secretary Janet Yellen has been touring Asian capitals to convince leaders about the idea of a ‘buyers cartel’ that should aim to cap the price of oil to limit how much refiners and traders can pay for Russian crude.

Prior to that, US President Joe Biden visited Saudi Arabia seeking assurances of more production from major oil producers in the Middle East in order to ease gasoline prices. The 31st Organisation of the Petroleum Exporting Countries (OPEC) Plus Ministerial Meeting held via video conference on August 3, 2022 approved a small increase in production, basically keeping oil output unchanged for September, in spite of calls from the US for more supply. OPEC Plus, which has Russia as a co-chair, has decided to increase production by 100,000 barrels a day in September, far less than the nearly 650,000 barrels a day that the group agreed to add in July and August.

According to the New York Times, “politically, the paltry increase in output – less than one-tenth of 1% of global oil demand, the smallest boost in memory — would appear to be a snub of Mr. Biden.”

More significantly, the group of oil producers underscored that Russia’s membership in OPEC Plus is vital for the success of the agreement. His Excellency Haitham Al Ghais of Kuwait, who took office as secretary general of the OPEC on August 1, stressed that the organisation is not in competition with Russia, calling it “a big, main and highly influential player in the world energy map.”

Since the war in Ukraine, information about transactions in Russia’s barrels has become less visible. What’s crucial is that the surge in international oil prices climbing to 14-year highs (above $130/bbl last in 2009) has rendered Western sanctions ineffective, softening the blow to Russia, and hence the desperate plan to cap prices. The proposal is to set the price at a level above Russian production costs, so as to provide an incentive for the Kremlin to keep pumping, but much below the current high market prices.

At the G7 summit in Germany, leaders agreed to have a price-capping mechanism on Russian oil exports in place by December 5, when European Union (EU) sanctions banning seaborne imports of Russian crude come into force. But most energy experts believe the proposition to be entirely ‘ridiculous’ which could push oil to over $140. According to Jorge Montepeque, credited with reforming some of the most important benchmarks for pricing oil, the history of similar attempts to limit the price suggests that a cap would lead to higher, not lower prices, and to the emergence of a grey market for Russian oil. In fact, with a shortage of energy and food, indications are that the EU might ease sanctions on Russia.

Even if the US and its G7 partners are able to prevail over India and other top importers to a price cap on Russian oil, market forces would quickly undermine such a stratagem. Russia is pushing all the crude oil that it can on to the global markets. Head of crude market analysis at Kpler, Viktor Katona, said that India has become the key market outlet for Russian crude. Data from Kpler shows that India’s imports of Russian oil hit a record in May with over 8.40 lakh barrels imported per day. Month-on-month data reveals an increase of 20% to one million barrels per day in June.

Also read: What a Potential US Recession Will Mean for the Indian Economy

Strategic implications for India

India requires five million barrels of oil per day, and so, it must continue to look out for the best discounted deals it can get, as per prevailing global rules. When the Trump administration had asked India to reduce its imports from Iran and Venezuela, India had agreed and reduced those heavily discounted imports to zero. And, it had shifted that demand to US oil, which was not discounted and more expensive, in order to respect her relationship with the US. However, now there are reports of the US dealing again with Venezuela for oil, which we will surely be requested to buy.

Such strategic shifts in global trade cannot be done every four to five years. There are efforts to revive the 2015 nuclear deal with Tehran that will lift sanctions on its oil exports, and more importantly, put a stop to the illicit Iranian sales. China’s purchases of Iranian oil have risen phenomenally, which would mean less supply will be available to Tehran’s previous buyers like Indian and European refiners, if the sanctions are removed.

Given that the US has been unable to convince OPEC to increase production, Iran and Venezuela are yet to enter the oil export market and US exports are expected to be under pressure, where will India get its oil?

Western sanctions are not endorsed by the UN or any other multilateral body, so India is free to deal with Russia on energy. There are no sanctions on Russian oil and gas exports to the EU, and the US did not even sanction Sberbank and Gazprombank, (barring some executives of the banks), which are the key transactors for energy. Further, the US has clearly stated that India does not violate its sanctions if it deals with Russia on this count, albeit it has faced considerable censure for continuing to buy from Russia.

India has significant investments in Russian energy and that relationship should continue. It buys Russian oil, runs it through its refineries, and sells ‘Indian refined products’ to the EU. The US needs to consider Indian interests as its own and assist India in building long-term energy relations. This would go a long way in India supporting the West in its resolve to strengthen freedoms and democracy.

Oil prices could rise further if India avoids buying Russian oil and this could hasten the onset of a recession or worse, a stagflation. Be it Russia, the US or OPEC, India should maintain a diverse mix of suppliers in the interest of its energy security.

Vaishali Basu Sharma is an analyst on strategic and economic affairs. She has worked as a consultant with the National Security Council Secretariat for nearly a decade.

Russia-Ukraine: How will Indian Markets Deal with a War?

While the Centre doesn’t have a clear role in so much as a correction is concerned, it is now faced with the effects of a commodity price surge, global instability, sharp foreign investor outflows and rattled domestic sentiment.

Two months into the year find financial markets in a tricky space. After negotiating the uncertainty and jagged nature of a post-COVID economic recovery, global markets now find themselves staring at the possibility of a full-blown war. The Russian military is carrying out airstrikes on Ukrainian military compounds, leaving a large part of the Western world tense and polarised. And crude has surged to triple digits.

Here in India, when taking a broader perspective, the quantum of the cuts for key indices is still not savage. Outperformers like IT have been punished hard (the Nifty IT Index has lost more than 15%) and the broader market is feeling bruised (Midcap Index down almost 10%).

As a jumpy market flits nervously from Ukraine to COVID recovery and also to a hawkish US Federal Reserve (Fed), three things have emerged clearly.

Global shivers, global money

Year to date, foreign investors have pulled out over Rs 53,000 crore from equities. To be fair, it is equally noteworthy that domestic money has tried hard to absorb that system shock; domestic institutions have bought approximately Rs 40,750 crore into the markets so far.

A smooth and often profitable run for SIPs so far will now face a dual test. Fresh money needs to keep coming into the market via SIPs and other instruments, but it also remains to be seen whether there can be a huge growth in the number of retail investors flocking to the stock market. Household incomes and savings are under pressure, retail inflation is ticking higher and Crypto remains a far bigger favourite for younger India than equities.

There’s also a degree of relentless pummelling here. In 2020, overseas investors closed the year with an inflow of a modest Rs 26,000 crore; down 84% from the Rs 1,70,260 crore they invested the previous year. To jog our memories, it was the worst inflow – quantum-wise – since calendar year 2018. This year, of course, we’re off to a roiling start with over Rs 50,000 crores offloaded.

Many things are going into the global blender at this point. March may bring the “lift-off” everyone’s expecting from the Fed. In fact, minutes from its meeting suggest it may even be open to tightening monetary policy more quickly than expected if US inflation doesn’t ease off. That places a big question mark on future inflows and the step-in-step edginess of global markets that has been on display over the last few weeks.

India may suffer more than others simply because it outran many markets on gains and valuations. The benchmark BSE Sensex rose over 20% on a year-to-date basis till December last year; the BSE Midcap was up almost 40% and the BSE Small cap index had a spectacular 60% run.

Added to all of that is the ongoing geopolitical tension around Ukraine. While there are tenuous links to draw between financial markets and geopolitical strife, what markets need less off is uncertainty. At this point, however, it is piling on in heaps.

Also read: Explained: What the Fed’s Inevitable Rate Hike Means for India and the Global Macroeconomy

Commodities and their sting

A $100/barrel mark on crude is here and all signals point to the commodity crossing those levels, if tensions escalate further and for longer between Russia and Ukraine.

Paul Hickin, director, S&P Global Platts writes about how the global economy can withstand a short-lived price spike, but a spike with a higher peak and longer duration does much greater damage to global oil demand and its recovery to pre-pandemic levels.

There are many ways in which this will play out badly for India. Retail prices will have to be upped, causing greater financial pain for households; the government may have to shell out more in its subsidy pay-outs for fertilisers; and with 80% of our oil needs met by imports, we are both hamstrung for want of options or choices and the Finance Minister now has a higher oil import bill to contend with.

Neither does this equate to a big lottery amongst the listed oil companies. While the ruling government attempts to kick the can down the road, thanks to ongoing state elections, oil marketing companies and refiners are left hamstrung and uncertain about the quantum of losses they may need to grin and swallow.

There is another development that’s slowly but surely building – Nickel has risen to $25,000/tonne; a first since 2011. Copper, now in hot demand for electric vehicles, wind turbines and other green energy initiatives, doesn’t seem to be in any mood to cool it’s rally. Goldman Sachs analysts are calling it “the new oil”. They see prices average $11,000 per metric ton over the next 12 months.

All this means far higher input costs for many frontline companies that were, so far, insulated from any big escalation in costs. Fast-Moving Consumer Goods (FMCG) firms have been candid about subdued demand in rural pockets, and the added pinch of high input costs sullies the earnings pitch for India – not the best background for a market that has been patently overvalued in many pockets and has enjoyed the fruits and attention of that overvaluation for months now.

Of big bets and IPOs

If 2020 was about a ‘big bang market’, 2021 was about an even bigger bang primary market; initial public offerings (IPO) were flowing on tap, valuations were stratospheric and there was a virtual stampede for subscriptions. From that point of milk and honey, things have turned quite quickly. One could debate the timing of this, but as I had written, post the Paytm listing, a sour run for this giant IPO may have been the cataclysmic beginning of the end for the IPO circus.

As the Indian Express collates, at least one in three IPO this financial year since is currently trading below its issue offer price. There’s similar damage across the mid and small cap fields, where stocks have already seen savage cuts of over 20% this year.

In the small cap space, the losses are even deeper. A lot of the froth is moving out of the system. That’s never an easy or painless process. It may also take with it a section of the more risk- loving trading section. What remains to be seen, is whether people will walk away with burnt fingers forever, as many did in the last bear market of 2008-2009, or whether they will come back to trade another day.

Also read: The Winners and the Losers of Union Budget 2022

All regulator hands on deck

The market correction, just like the pandemic, will take its course. Stocks will bleed, prices will be reset and lessons will be learnt. What’s more important from here on, especially in the context of this year, is what our key regulatory authorities choose to do.

Number one; the Reserve Bank, that was either feeling extremely optimistic or extremely misplaced in its reading of the situation. Rising inflation is not going away in a hurry; it is and has been sticky in nature and will likely get worse, given the trends on crude oil and the pass-through we will face on petrol and diesel prices post the election results in March.

By attempting a status-quo on rates, the central bank is creating an atmosphere of uncertainty and confusion. It is, of course, another matter that they have also chosen to disregard the growing and apparent inequality of incomes in India, but let’s leave that discussion for another day.

Number two; after a crash-and-burn run through 2021, there’s still a lot of IPOs set to hit the market. The Life Insurance Corporation (LIC) is the biggest and the first to go, but it will be followed by many others, including Ola, Byju’s and Delhivery. This is the time to set things in order. With respect to pricing and the role of anchor investors and transparency of financials, especially with regards to start-ups.

And finally, the Finance Ministry, that doesn’t have a clear role in so much as a financial market correction is concerned. But it will also be the first time they are faced with the effects of a commodity price surge, global instability, sharp foreign investor outflows and rattled domestic sentiment. It will also need to watch the sharp gyrations on the Crypto market, which as we now know, is taxed but not legitimate. With prices sliding sharply on actively traded coins like Bitcoin, there may well be fire-fighting required on multiple fronts.

The markets have shown their hand. A geo-political crisis is underway. Are India’s regulators ready?

RBI’s Monetary Policy Committee Sounds Cautious on Inflation

The six-member MPC had unanimously decided to maintain the inflation rates two weeks ago, while staying optimistic on growth.

India’s Monetary Policy Committee (MPC) sounded cautious on the inflation outlook, while acknowledging a sharp fall in food and crude oil prices, according to minutes of its December 5 meeting published on Wednesday.

The six-member MPC had unanimously decided to maintain the rates two weeks ago, while staying optimistic on growth.

While Reserve Bank of India (RBI) under the former Governor Urjit Patel sounded hawkish in the monetary policy minutes, the panel, under the new chief Shaktikanta Das, might be more focused on boosting growth and cutting rates after the recent sharp decline in inflation.

Also Read: After Urjit Patel Drama, RBI Must Turn Its Attention to How It Can Help India’s Economy

Das took charge at the RBI last week, two days after Patel’s abrupt resignation.

(Reuters)

Rupee Breaks Its Three-Day Recovery Trend to Drop to 73.93 Against Dollar

A spurt in dollar demand from importers amid sustained foreign fund outflows also weighed on the rupee.

Mumbai: The rupee dropped 36 paise to 73.93 against the US currency in early trade Monday, breaking its three-day recovery trend, as crude prices rose amid weak macroeconomic data.

A spurt in dollar demand from importers amid sustained foreign fund outflows also weighed on the rupee.

Dealers said, factors like the dollar’s strength against some other currencies overseas and a volatile opening of the equity markets also impacted the domestic currency.

Also read: Is the Rupee Overvalued or Undervalued?

Industrial production slipped to a three-month low of 4.3% in August and retail inflation rose marginally to 3.77%

Friday, the rupee had ended 55 paise higher at 73.57 against the dollar, as global crude prices eased and domestic indices staged a smart rebound.

Foreign institutional investors sold shares to the tune of Rs 1,322 crore Friday, provisional data showed.

The benchmark BSE Sensex fell by 70.85 points, or 0.20%, to 34,662.73 in early trade after crossing the key 35,000-mark to hit a high of 35,008.65 at the outset.

As Oil Turmoil Continues, Will ONGC and Oil India Be Asked to Share the Subsidy Burden?

Petrol and diesel prices have shot up by Rs. 2.24 and Rs 2.15 a litre respectively since oil marketing companies (OMCs) resumed daily price revision on May 14.

New Delhi: The potential return of an under-recovery sharing mechanism is currently looming over upstream oil companies as the Modi government moves to calm simmering public anger over rising auto fuel prices.

As petrol and diesel prices hit new highs on Tuesday, media reports, quoting anonymous senior government officials, said that the Centre may come out with “some steps” this week to provide relief to auto fuel consumers.

This unnamed official, however, hinted that the government may not cut excise duty which makes up about a fourth of the final price of petrol and diesel.

“Rising fuel price is a crisis situation for government and it has to be handled with combination of steps. Finance ministry is consulting the petroleum ministry on rising crude prices,” he told PTI.

Petrol and diesel prices have shot up by Rs. 2.24 and Rs 2.15 a litre respectively since oil marketing companies (OMCs) resumed daily price revision on May 14 after a 19-day gap when price revision was put on hold due to Karnataka elections.

Meanwhile, according to Reuters, oil rose towards $80 a barrel on Tuesday in the global market, supported by concern that falling Venezuelan crude output and a potential drop in Iranian exports could further tighten global supply.

Crude is trading at the highest since late 2014, underpinned by a supply-cutting deal among the Organization of the Petroleum Exporting Countries (OPEC) plus Russia and other non-members, and strong global demand.

Brent crude LCOc1, the global benchmark, rose 54 cents to $79.76 a barrel by 1221 GMT. Last week, it topped $80 for the first time since November 2014.

Subsidy sharing

If the government revives the petroleum subsidy sharing mechanism, upstream majors like ONGC and Oil India could see erosion of their profits. But little impact is seen on profits of OMCs.

ONGC and OIL had for more than 13 years paid as much as 40% of the under-recoveries arising from fuel retailers selling petrol, diesel, domestic LPG and kerosene at a government-mandated price, which was way below the cost.

This subsidy sharing ended in June 2015 when global oil prices started falling on concern over global economic slowdown.

The government freed petrol price from its control in June 2010 and diesel in October 2014. It now provides a limited subsidy on LPG and kerosene. Even on LPG, the government from August 2017 stated to hike per cylinder selling price gradually, with a view to finally phase out subsidies.

International credit ratings agency Moody’s has said if ONGC and OIL are obligated to contribute the entire subsidised amount exceeding the government’s budgeted figure for 2018-19 fiscal, it would reduce their net price realisation to $52-56 per barrel. Upstream players reported per barrel net price realisation $56 on crude sales in 2017-18.

Moody’s has estimated that government’s fuel subsidy bill would anywhere between Rs 34,000 crore to Rs 53,000 crore in the current fiscal, the highest since 2014-15, assuming Brent crude oil prices average $60-80 per barrel.

Retail price of petrol, diesel in India and neighbouring countries on May 1, 2018: A comparison

Country	Petrol (Rs/litre)	Diesel (Rs/litre)
India (Delhi)	74.63	65.93
Pakistan	50.67	57.06
Bangladesh	68.47	51.75
Sri Lanka	49.67	40.33
Nepal (Kathmandu)	66.69	54.73

Source: PPAC

Brent crude is already hovering close to $80.

But the government has budgeted just Rs 25,000 crore for fuel subsidies in 2018-19, which could fall far short of requirement if the current uptrend in the global crude market continues.

The Centre is not in a position to slash excise duty on petrol, diesel due to its weak fiscs. States too have ignored calls for reducing sales or value-added tax on petrol and diesel.

Petrol, diesel remain outside the ambit of Goods and Services Tax (GST), leaving the scope for states to levy tax on auto fuels according to their choice.

Arun Kumar Das reports:

The Congress on Tuesday also made a scathing attack on the Modi government over rising oil prices and demanded reduction in excise duty on fuel in BJP-ruled states while hinting at doing the same in its own ruled state in Punjab to ease the burden on common man.

Taking a dig at the BJP government, Congress spokesperson Pawan Khera asked what business model the government was following with regard to fuel prices since international crude oil was at $107.57 per barrel in May, 2014, which has come down to $79.

However, in the same period, petrol and diesel prices have risen from Rs 71.41 and Rs 55.49 respectively to Rs 76.87 and Rs 68.08 in Delhi.

Manmohan Singh Accuses Modi of ‘Economic Mismanagement’, Says Crisis Was Avoidable

Former prime minister said that every time the BJP government is asked for an answer for any of its”disastrous policies”, “all we hear is that the intentions are virtuous.”

Bengaluru: Former Prime Minister Manmohan Singh today launched a scathing attack on the Narendra Modi government for its “disastrous policies” and “economic mismanagement”, and said that the country was facing crises that were avoidable.

Singh attacked the government over a series of banking sector frauds, saying that the money swindled almost quadrupled from Rs 28,416 crore in September 2013 to Rs 1.11 lakh crore in September 2017. “Perpetrators of these frauds meanwhile escape with impunity. The economic mismanagement of the Modi government, and I say this with great care and responsibility, is slowly eroding the trust of the general public in the banking sector,” he said.

“Our nation today is experiencing difficult times. Our farmers are facing an acute crisis, our aspirational youth are not finding opportunities, and the economy is growing below its potential,” Singh told reporters here. He said that the “unfortunate truth” was that each of these crises was “entirely avoidable”.

According to him, the two “major avoidable blunders” of the Modi government had been demonetisation and hasty implementation of the Goods and Services Tax. He said the losses the economy suffered due to these blunders had severely hurt the micro, small and medium enterprises and resulted in the loss of tens of thousands of jobs.

Bengaluru: Former prime minister Manmohan Singh addresses a press meet at Karnataka Pradesh Congress Committee office during his visit to the state, ahead of the Assembly polls, in Bengaluru on Monday. Credit: PTI Photo by Shailendra Bhojak

BFormer prime minister Manmohan Singh addresses a press meet at Karnataka Pradesh Congress Committee office during his visit to the state, ahead of the Assembly polls, in Bengaluru on Monday. Credit: PTI/Shailendra Bhojak

“It pains me to see how rather than standing up to all these challenges, the governments response has been to stifle dissent when deficiencies are pointed out,” he added.

Noting that economic policy has a significant impact on the lives of people, he said it was essential that those tasked with decision making pay careful attention to policies and programmes and not act on mere whims and fancies. “India is a complex and diverse country and no one person can be the repository of all wisdom,” he said in an apparent dig at Modi.

He said every time an answer was sought for any of the “disastrous policies” of the BJP government, “all we hear is that the intentions are virtuous.” Singh said the intentions of the Modi government which it claimed were good, have resulted in “massive” losses for the country and added that “its lack of reasoning and analysis is costing India and our collective future.”

The former prime minister said that under the UPA governments the growth rate averaged 7 per cent. and was 8 percent at one point of time despite turbulent global conditions. The NDA government, he said, clocked inferior growth rate despite a favourable international climate and low oil prices. In fact, growth rate under the NDA is lower in spite of the change in the methodology to determine it, “which paints a rosier picture than reality”, Singh said.

Besides, exports as a share of the GDP plunged to a 14-year low at a time when the global economy was reviving and exports of other Asian nations like Vietnam were growing substantially, he said. He further mentioned that petrol and diesel prices were at a “historic high” despite a fall in international crude oil prices because the Modi government had chosen to levy “excessive” excise duty.

“Instead of passing on the benefits of low prices to the people, the Modi government has punished the people,” he said.

Hot-Money Risks Seen Rising as India Courts ‘Bond Tourists’

The RBI lifted a restriction that limited foreign investors to buy bonds with three years or more to maturity and also gave them access to short-term sovereign treasury bills.

Mumbai/Singapore: A series of measures from the Reserve Bank of India (RBI) to lure foreign buyers into the country’s short-term debt market could easily backfire, investors fear, exposing the economy to volatile “hot money” flows.

The RBI lifted a restriction limiting foreign investors to buying bonds with three years or more to maturity and also gave them access to short-term sovereign treasury bills. The RBI’s lifting of the maturity restriction came after India‘s government bonds tanked when sovereign bond auctions failed to attract many buyers, followed by a spike in yields when surprisingly hawkish minutes of a monetary policy meeting raised fears of the RBI hiking interest rates.

The new rules have stoked fears of an influx of “bond tourists” and the associated rapid-fire switching in and out of short-term debt by foreign traders.

Such volatile flows could make India‘s financial markets more vulnerable at a time when the rupee has been the worst performer in the region, high oil prices are driving up the current account deficit, and interest rates could soon rise on heightened inflation risks, investors said.

“It encourages more short term inflows and therefore exposes India to more hot money flows and volatility in the long run,” said Johnny Chen, an investment manager at NN Investment Partners in Singapore, focusing on Asian local currency debt.

The RBI did not have an immediate response when asked to comment on the traders’ remarks.

The immediate reaction to the lifting of maturity curbs on overseas buyers was less than inspirational, with foreigners selling a net $240.92 million of bonds on May 2 – a day after the RBI’s announcement.

Indian bonds have seen massive swings in the last month and the level of selling has picked up sharply.

Foreign investors sold a net $2.39 billion in bonds in April, the biggest monthly selloff since December 2016.

Late on Friday the RBI unexpectedly announced it would buy government bonds via open market operations, a signal intended to moderate yields.

India needs robust dollar inflows to help bridge its widening current account deficit and support the steep fall in the currency, but the RBI’s new rules could make the economy more vulnerable to volatile dollar flows and scare off long-term ‘patient’ investors.

The new rules for foreign investors are not yet in force. The start date will be announced by the stock market authority that regulates foreign investors.

The rupee has fallen by 4.8 percent so far this year, weakening as much as to 67.0850 to the dollar on Monday, its lowest level since February 2017.

The benchmark 10-year Treasury bond yield has risen by as much as 50 basis points since start of January on top of a 82 basis point rise from July to December last year, severely undermining foreign investors’ bond holdings as prices fell accordingly.

“We have seen some asset managers choose not to hedge open positions and so there are risks to investment in the rupee debt market,” said Li Huang, associate director, fund and asset manager rating group at Fitch Ratings in Shanghai.

With India importing 80% of its oil requirements, crude prices will be a key factor determining the country’s current account, rupee and inflation risks.

“Despite real-money (foreign) investors not selling off India in a big way, bonds and the rupee have lost heavily,” said a trader acting for foreign investors.

“I shudder to imagine what might happen once the hot money traders start moving in and out of India in extremely short time-spans. There is no sense for the RBI to take such short-term measures and attract opportunistic flows.”

(Reuters)

India’s Trade Deficit Widens to Near Three-Year High in October

The trade deficit widened to $14.02 billion last month from $8.98 billion in September.

A mobile crane carries a container at Thar Dry Port in Sanand in Gujarat, India. Credit: Reuters

A mobile crane carries a container at Thar Dry Port in Sanand in Gujarat. Credit: Reuters

New Delhi: India’s trade deficit widened to its highest in nearly three years in October, government data showed on Tuesday, as export growth contracted for the first time after more than a year.

The trade deficit widened to $14.02 billion last month from $8.98 billion in September, data from the Ministry of Commerce and Industry showed.

The trade deficit has widened by more $31 billion in the first seven months of the current financial year to $86.15 billion, which could put pressure on the current account deficit of Asia’s third largest economy.

Merchandise exports for October fell 1.12% from a year earlier to $23.1 billion, dropping for the first time since August 2016, dragged down by fall in gems, jewelry and textile exports.

A large number of exporters have been unable to meet their export orders despite a revival in global demand as billions of dollars were stuck under the new nationwide tax launched in July, exporters said.

“The refund of inputs tax credit under the new Goods and Services Tax system has been stuck since July, hitting exports,” Ganesh Kumar Gupta, president of Federation of Indian Export Organisations, said.

Goods imports were up 7.6% from a year earlier to $37.12 billion.

Higher crude oil prices and a more than a quarter jump in volume from a year ago pushed India’s petroleum imports to $9.29 billion, also helping to widen the trade gap.

Crude prices have rallied, sending Brent crude to its highest since June 2015, a worry given that India imports most of its energy needs.

(Reuters)