"Whatever it takes" to defend the Rupee
Comment of the Day

August 13 2013

Commentary by Eoin Treacy

"Whatever it takes" to defend the Rupee

Thanks to a subscriber for this interesting note from Deutsche Bank. The full report is posted in the Subscriber's Area but here is a section
Measures aimed at enhancing capital flows include:

Public sector financial institutions – India Infrastructure Finance Co. Ltd., Power Finance Corporation Ltd. & Indian Railway Finance Corporation Ltd. to be allowed to raise a cumulative USD4bn through quasi-sovereign bonds to finance long term infrastructure sector needs

Liberalization of external commercial borrowing (ECB) guidelines (notification awaited; likely to increase flows by an additional USD2bn)

PSU oil companies to be allowed to raise additional funds (USD4bn) through ECBs and trade finance

Liberalizing NRE/FCNR deposit schemes (notification awaited; likely to increase flows by an additional USD1bn)

According to the Finance Minister's estimate, the current account deficit constraining measures should help to reduce the CAD to USD70bn in FY13/14 (or 3.7% of GDP), which would constitute an improvement of USD18bn from last year (in FY12/13, CAD was USD88bn, or 4.8% of GDP). The authorities expect gold and oil imports to be lower by about USD5-5.5bn this year, while the remaining improvement is likely to result from a compression in nonoil/ non-gold imports, some recovery in exports and robust invisibles.

Eoin Treacy's view While no country is willing to tolerate a strong currency indefinitely, the weakness of the Rupee has become a political liability which has resulted in rather extreme measures being targeted at the banking sector in particular. If the administration can succeed in restoring confidence in the currency, the outlook for Indian equities is likely to improve commensurately.

The Bombay Banks Index posted an upside key day reversal today suggesting a low of at least near-term significance. Upside follow through tomorrow would lend credence to this view and suggest some unwinding of the short-term deeply oversold condition. The Nifty Index extended its rebound today.

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