India Signals Readiness to Defend Rupee

By Anoop Agrawal and Unni Krishnan - Dec 5, 2011 11:49 AM GMT+0700

India signaled it’s prepared to act against excessive declines in the rupee, as Asia’s worst performing currency this year threatens to exacerbate the fastest inflation among so-called BRIC nations and hurt growth.

The recent sharp depreciation isn’t a sign of “helplessness in dealing with the kind of global turbulence we are seeing,” central bank Deputy Governor Subir Gokarn said in Mumbai on Dec. 3. “We do have the instruments to do this in the form of strategic capital controls, which can be used to enhance the supply of foreign exchange.”

The rupee has fallen 12.9 percent this year as investors sold emerging-market assets on concern Europe’s debt crisis will lead to a global recession. India’s economy expanded last quarter at the slowest pace since 2009 after the central bank raised interest rates by a record to tame inflation, while Prime Minister Manmohan Singh’s efforts to stimulate growth were hamstrung by corruption scandals that have stalled legislation.

“The central bank is trying to manage expectations right now having given an impression that they don’t have the tools to control rupee weakness earlier,” said Ramya Suryanarayanan, an economist at DBS Group Holdings Ltd. in Singapore. While it would be pointless to fight the trend, “there are negative consequences, in the short term, given the speed of the fall.”

Asian currencies from Indonesia to India have fallen this year as policy makers grapple with Europe’s protracted sovereign-debt crisis, which has hurt demand for the region’s exports and prompted nations from Australia to Thailand to lower borrowing costs.

China Services

Asia’s stocks pared gains today after a report showed China’s non-manufacturing industries contracted last month. The MSCI Asia Pacific Index (MXAP) rose 0.2 percent at 1:42 p.m. in Tokyo after earlier rising as much as 0.4 percent. The Shanghai Stock Exchange Composite Index retreated 0.6 percent.

A China purchasing managers’ index for non-manufacturing industries fell to 49.7 in November from 57.7 the previous month, the China Federation of Logistics and Purchasing said on its website Dec. 3. A reading above 50 indicates expansion. A services index issued by HSBC Holdings Plc and Markit Economics today fell to 52.5, the lowest level in three months.

Elsewhere in the Asia-Pacific region, reports today showed Australian business profits advanced 4.8 percent in the third quarter from the previous three months, more than economists estimated, while inventories declined, as high commodity prices boosted earnings in mining. New Zealand construction fell to the lowest level in more than 10 years in the third quarter. Taiwan may report at 4 p.m. inflation held near a nine-month low.

Australia Rates

Australia’s central bank will probably make its first consecutive interest-rate cuts this quarter since the global recession that followed Lehman Brothers Holdings Inc.’s 2008 collapse. Traders are betting on an 88 percent chance that Reserve Bank Governor Glenn Stevens, who lowered borrowing costs last month for the first time in 2 1/2 years, will reduce the key rate tomorrow by a quarter percentage point to 4.25 percent, a Credit Suisse Group AG Index shows.

Service industries in the U.S. probably expanded in November at the fastest pace in six months, economists said before an Institute for Supply Management’s non-manufacturing index report today. Other reports may show factory orders fell in October.

Russia’s inflation rate probably fell last month to the lowest since September 2010, a Bloomberg survey showed ahead of data today or tomorrow. Euro zone retail sales, and services PMIs for Spain, Italy, Germany, France and the U.K. are also due today. Spain will report industrial output for October.

India’s Signal

In India, where the government said last week it has limited scope for a boost in spending to create demand and spur growth, the Reserve Bank of India signaled in October it’s nearing the end of monetary tightening, provided inflation slows.

India’s benchmark wholesale-price inflation was 9.73 percent in October. By comparison, consumer prices rose 7 percent in Brazil, 5.5 percent in China and 7.2 percent in Russia in the same month. The central bank has boosted the repurchase rate by 375 basis points in 13 moves since the start of 2010, the fastest round of increases since the monetary authority was established in 1935, according to Bloomberg data.

The rupee’s decline is adding to concern Indian policy makers will be unable to cool inflation which has stayed above 9 percent all year. The currency weakened 6.7 percent against the dollar last month, the biggest decline in almost two decades, touching a record low of 52.4550 on Nov. 25.

‘Warning Shot’

Foreign-exchange reserves fell $4.3 billion to $304.4 billion in the week ended Nov. 25, the central bank said in a statement on Dec. 2, a sign it sold dollars to stem losses. Intervention isn’t “an easy judgment” and the RBI has no target exchange rate for the rupee, Gokarn said.

“He’s firing a warning shot,” rather than committing the central bank to a series of capital controls, said Robert Prior- Wandesforde, Singapore-based head of India and Southeast Asia economics at Credit Suisse Group AG. “That hasn’t been their policy and would go against their stated aims. It may be designed to scare the speculators.”

Any measures are more likely to be designed to encourage greater inflows rather than to discourage outflows, he said. India needs to do more to keep the rupee from weakening further “given the inflationary issues,” he said.

“Our broad objective is to find a balance between the short-term risk of the rupee spiraling downwards and the medium- term risk of a loss of confidence in our ability to meet our external obligations,” Gokarn said.

Currency Swaps

On Nov. 23, the central bank raised the limit on interest rates paid by the nation’s companies on some maturing overseas borrowings and also relaxed rules for currency swaps in an attempt to stem the rupee’s slide. The currency rose 0.6 percent the following day.

There are already restrictions on debt inflows applying to quantity, tenor and pricing, Gokarn said.

“Short-term debt is the least preferred, because it’s seen as most vulnerable to sudden reversals, while long-term, despite risk concerns, is seen as contributing to the resource flow into infrastructure,” he said. “These controls on debt might be viewed as structural or strategic capital controls.”

Overseas investors have sold $325 million more of Indian stocks than they bought this year through Dec. 1, according to exchange data. Asia’s third-largest economy grew 6.9 percent in the three months to September from a year earlier, the slowest pace in more than two years.

To contact the reporters on this story: Anoop Agrawal in Mumbai at aagrawal8@bloomberg.net; Unni Krishnan in New Delhi at ukrishnan2@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net