Sep 19 2018

Half hearted efforts seldom succeed

After shaking the markets with more than 1 rupee appreciation in a few hours (please check my previous mail below), Govt of India came out with some measures to stem rupee’s relentless decline.

The measures were:-

  1. For ECBs: a review of the mandatory hedging conditions for external infrastructure loans and the permission for manufacturing companies to raise up to $50 million through such loans for a minimum period of a year (down from 3 years previously).
  2. An exemption for Masala bonds issued in 2018-19 from withholding tax (this will encourage more people to issue such bonds) and removal of the restriction on Indian banks on market making for such bonds including underwriting them.
  3. Review the cap on the exposure of foreign portfolio investors in bonds of a business group (currently 20%) and 50% of a single bond issue. This will encourage foreign investors to buy more bonds.

The above tries to address the issues related to the demand side as well as supply side of the forex markets. Will these measures have the desired impact in the immediate term? – most probably no. It might have an impact in the medium term, but extremely doubtful for the short term.

Markets gave a huge thumbs down (as expected) and rupee opened with a massive down gap of 67 paise (Monday’s opening of 72.52 vis-a-vis Friday’s close of 71.85).

A few things are getting evident:

Markets are smarter than we think – superficial attempts will not get the desired results.

Substantial rupee gains in the short term is unlikely – unless Govt/RBI comes up with something more tangible.

Rupee might continue to remain under pressure since factors like worsening US-China trade war, rising crude prices, weakening of emerging market currencies could persist.

Brace for volatility: options still remain the best bet. Forwards could be fraught with risk.

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