Budget 2019 should not affect value of rupee: Government to emissaries

Government emissaries tapping into foreign investors have been advised to ensure its Budget priorities do not adversely affect the value of the rupee, which means keeping a leash on fiscal deficit. 
 

This is particularly necessary the investors have said, for India to push for more foreign investors to pick up stake from the bankruptcy-hit companies. 

Government emissaries had met a spectrum of foreign investors in the past couple of months to figure out ways to draw in more capital into the economy.

The investors have agreed that other than the capital markets through which foreign investors have typically pushed in money into India as portfolio investments, there was a large scope for direct investments on a medium-time horizon, too. Investors abroad could pick up some of the stakes of companies in the National Company Law Tribunal (NCLT) framework to eventually break those up and sell to future investors. 

While Jet Airways is in the NCLT, it is possible that the government may add its own Air India to the list of companies, awaiting suitors. 

But this was only possible if the exchange value of the Indian rupee held steady. The currency has traded in a narrow band in 2019 and its gain so far has been 0.3 per cent. This gives confidence to the overseas investors. 

The rupee could remain stable, if Finance Minister Nirmala Sitharaman holds on to a prudent borrowing limit from the market in her Budget speech on Friday. In the futures market the $-Rs  currency pair is trading at 69.29 and with US President Donald Trump pushing for a rate cut by the Federal Reserve, the rupee is expected to strengthen even more to 67.9 against the US dollar. 

The rise in the level of foreign exchange reserves to $426.24 billion as per latest Reserve Bank of India data would add to the stability of the currency. 

“The India government’s macro policies are quite stable both on keeping inflation low and sticking to a prudent fiscal limit. With a stable five-year term, India offers plenty of good opportunities where currency fluctuations should not roil prospects”, said Soumyajit Niyogi, associate director, credit and market research at India Ratings. 

But if Sitharaman plans to borrow more from the markets this would scare off the foreign investors into companies. More borrowings mean lower prices for government papers and therefore consequent pressure on the rupee to decline against foreign currencies. Once that happens, the investors who have put money in Indian assets would face a capital loss, since as per Indian currency regulations those investments have to be made in Indian rupees and this imposes a currency risk on the investors. 

Government officials say with more and more Indian companies approaching the bankruptcy courts for settlements, it was becoming increasingly difficult to find domestic investors to buy those assets. 

A CRISIL study shows under the Insolvency and Bankruptcy Code of the 94 companies with liability of Rs 1.7 trillion as of March 2019, the recovery amounted to Rs 0.7 trillion. But while the average haircut read 58 per cent for financial and operational creditors, netting out the 16 resolutions for the steel sector, the hair cut rose to 69 per cent for others spanning textiles, construction, and auto components. This is where the government hopes foreign investors would step in. 

The agenda is serious enough for the finance ministry. The headroom available in the share markets for foreign investors to put money in is getting quite restricted as the pool of liquid scrips have shrunk due to the slowdown in the economy. With both non-banking companies and liquid mutual funds facing severe liquidity constraints, one of the few plausible windows for additional capital to come into the economy is through foreign investments. Gross domestic bank credit stood at 12 per cent in both May and April, 2019, just a 100 bps over that of May 2018.

The government is also hopeful its pitch would be successful as investment growth across Asia-Pacific's trade-dependent economies including Korea, Malaysia, and Singapore, has fallen to a seven-year low. “For China, investment in technology-related manufacturing is expanding at its lowest level since at least 2004”, S&P Global Ratings has noted in a June report on Asia Pacific.