Friday, August 30, 2013
(Reuters) - The patriotism of wealthy overseas Indians has helped the country avert economic crises in the past and it is little surprise that embattled policymakers are turning to them again to plug a record trade gap that is battering the rupee.
This time, though, big investors among the more than 25-million overseas Indian community - the world's second-largest diaspora - are staying away as the economic outlook darkens and political instability looms ahead of national elections.
Shoring up inflows from the overseas Indians is a key weapon in Finance Minister P. Chidambaram's arsenal to prop-up the rupee that has lost 20 percent against the dollar so far this year and which dropped to a record low on Wednesday.
The rupee's crash has boosted remittances, mainly from blue-collar workers overseas - particularly in the Gulf - who can get more rupees for hard currency. However, it has not triggered a surge in high-value investments in real estate, private equity funds and stock markets, bankers and wealth said.
Underlining the hesitancy, flows from non-resident Indians (NRIs) into bank deposits in the April-June quarter dropped to $5.5 billion from $6.6 billion a year-earlier, central bank data shows.
Investments in real estate by overseas Indians dropped about 30 percent in the fiscal year that ended in March, according to the Confederation of Real Estate Developers' Associations of India (CREDAI), an umbrella group of local property developers.
"People feel like there are too many unknowns. The most recent government has been ghastly, and nobody quite knows what comes after it. I haven't been optimistic about India for quite a while," said Vasant Prabhu, chief financial officer of Starwood Hotels & Resorts Worldwide Inc (HOT.N) in New York.
"What makes it hard, you don't know what the bottom of the rupee is," he said in comments underscored by a rupee that stumbled from 63 per dollar on Friday to almost 69 per dollar on Wednesday - a sharp move over such a short period of time for a currency.
His comments were echoed by wealth managers and bankers in Britain, the United States and India who said non-resident Indian clients saw too many uncertainties despite the tantalising prospect of buying assets with a record-low rupee.
Economic is at its weakest in a decade and seen slowing further, New Delhi is struggling to close a record deficit in the current account - the broadest measure of a country's international trade - and a national election that must be held by May could tempt the government to spend to win over voters and so undermine its fiscal discipline.
In addition, emerging markets are losing favour with investors generally as the prospect of the United States reining in its economic stimulus draws cash into U.S. assets.
In a bid to attract funds, India liberalised bank deposit schemes and some banks raised rates for overseas Indians this month. They could secure interest rates of more than 8.5 percent on one-year rupee deposits and as much as 10 percent on three-year accounts, a relatively high return compared with many other countries where rates remain near historic lows.
"All these folks always had this strong belief that India is the safest country to invest and four, five years back when the rest of the world was collapsing India was still growing," said Anish Behl, head of wealth and strategy at lender IndusInd Bank (INBK.NS), referring to the global financial crisis.
"That mood has changed now," he said. "I can certainly feel that some NRIs are looking at dollar-based products from international stables ... they are very wary of pure rupee products."
The government goes out of its way to tug at the heartstrings of white-collar expatriates, such as those in Silicon Valley and at top investment banks in London, to raise funds and cushion the impact of slowing institutional inflows. There is even a ministry for Overseas Indian Affairs which has NRI investment as a core goal.
New Delhi has managed to lure them in the past with attractive deposit schemes and bonds. It issued a five-year Resurgent India Bond in 1998, raising more than $4 billion, and in 2000 it raised $5.5 billion through a deposit scheme.
India, Asia's third-largest economy, was the top recipient of remittances from diaspora in 2012 with about $70 billion, followed by China at $66 billion, World Bank figures show. India received about $63 billion in remittances in 2011.
Banks, including RBS (RBS.L), Barclays (BARC.L) and Morgan Stanley (MS.N), beefed up their teams in cities like New York, Singapore, Dubai and Hong Kong in recent years to advise overseas Indians on investment opportunities back home.
But many investors are now staring at losses as the rupee's plunge since May has wiped out gains they made on investments in private equity funds and mutual funds in the last few years.
"For people who are dollar-invested, that's a large hit," said Ajay Kaisth, principal of New Jersey-based Kai Advisors, which has $30 million under management, of which more than 60 percent is from Indian clients.
After trading broadly around 45 per dollar in 2010 and 2011, the rupee has dropped more than 30 percent.
The economy is likely to grow even more slowly in fiscal 2013/14 (April-March) than the decade-low of 5 percent struck the previous year, as investment will stay weak due to a dearth of reforms and uncertainty ahead of the election, a Reuters poll showed.
The rupee has become the worst performer by far among Asian emerging-market currenciestracked by Reuters, despite frantic attempts by the government and central bank to support it.
Lalit Kumar Jain, chairman of CREDAI said property purchases by Indian expatriates were now needs-based rather than speculative, reducing what has been in the past a key type of demand.
As a portfolio investment destination, India also faces daunting competition as developed markets, including the United States, show signs of finally emerging from the global financial crisis, said Bundeep Singh Rangar, who advises individuals as well as companies on India investments as chairman of London-based IndusView Advisors.
"And that's a cause of concern because the biggest champion of India is its diaspora, and if they are losing faith you can imagine how much the non-Indian investor would be losing faith."
(The story corrects name in 13th paragraph to Anish from Anil)
(Additional reporting by Suvashree Dey Choudhury; Editing by John Chalmers and Neil Fullick)
Thursday, August 29, 2013
IndusView, Thursday 29 August 2013 (London): The Indian government is taking steps to stem the fall of the rupee, which has lost about 20% of its value this year.
The Indian government has approved infrastructure projects worth $28.4 billion to revive the economy and boost the falling rupee. Finance Minister P Chidambaram said 36 stalled projects in oil, gas, power, road and railways sectors were cleared.
The Reserve Bank of India (RBI) also unveiled plans to bolster the currency by lending dollars to state-backed oil groups. The central bank said it would use swap agreements to sell dollars to three companies, Indian Oil, Bharat Petroleum and Hindustan Petroleum, as part of a plan to fund oil imports.
A number of Indian banks have started increasing interest rates on non-resident Indian (NRI) fixed deposits with long-term maturities to attract foreign currency. Federal Bank, Axis Bank and IDBI Bank have joined Karnataka Bank and Dena Bank, who have already raised their rates for non-residence external (NRE) fixed deposits following the liberalisation of the same by the RBI.
“India’s secret weapon is its 25 million strong overseas diaspora who sent twice as much money into India last year than FDI and FII combined,” said Bundeep Singh Rangar, Chairman of London-based advisory firm IndusView. “$70 billion in annual remittances by Non-Resident Indians (NRIs) provides India with a distinct advantage over other BRIC economies, which is expected to increase to about $80 billion this year with the rupee depreciation.”
India’s dependence on foreign capital is also high and has risen sharply. The current-account deficit soared to almost 7% of GDP at the end of 2012, although it is expected to be 4% to 5% this year. External borrowing has not risen by much relative to GDP—the ratio stands at 21% today—but debt has become more short-term, and therefore riskier.
“A cheaper rupee will also encourage exports and discourage imports,” said Rangar. “If investment and exports begin to surge again, business confidence will return; that’s when the rupee will strengthen.”
The rupee has lost about 20% of its value this year and is one of the world's worst performing currencies. India's currency has also been hurt by a range of other factors, not least the country's burgeoning current account deficit.
“The government needs to be more proactive,” added Rangar. “So far, all the actions taken have been to contain a crisis and not to prevent it”
India's current account deficit, which stood at 4.9% of the GDP in calendar year 2013, was the third highest in the world in terms of absolute numbers. At $98 billion, India's current account deficit in absolute numbers stood behind only the US ($473 billion) and the UK ($106 billion).
“A widening deficit not only puts a strain on the nation's foreign exchange reserves and but also indicates that it may need to borrow more money,” said Rangar. “That has triggered fears that India may not be able to trim its deficit.”
India imports almost 80% of its oil and there are concerns the higher prices will lead to higher inflation and a worsening of India's deficit.
The Wholesale Price Index, India's most closely watched inflation gauge, dropped to 4.7% in May on an annual basis, down nearly two-tenths of a percentage point from its 4.89% level in April. The broadly based wholesale price inflation reading, the lowest since late 2009, was well below market forecasts of a 4.9% rise.
A slowdown in India's growth rate - which has hit its lowest level in a decade - has also hurt investor confidence. International investors have withdrawn nearly $12 billion in shares and debt from India's markets since the beginning of June.
India's economic growth rate slipped to a decade low of 5% in 2012-2013 on account of poor performance of farm, manufacturing and mining sectors. It is projected to rise to 5.7% in the 2013 fiscal year and firm to 6.5% and 6.7% in 2014 and 2015, respectively.
Policymakers have consistently struggled to come up with steps that can convince markets they can stabilize the rupee and attract funds into the country despite extraordinary measures last month by the central bank to drain liquidity and action to curb gold imports and cut India's huge oil import bill.