)
The finance ministry has started preparing for the US Federal Reserve's winding down of its $85 billion-a-month bond buying programme, known as quantitative easing (QE). The ministry's actions are focused on the debt front, according to officials.
"In equity, foreign institutional investors (FIIs) are present in India for 15-20 years and worry more about growth prospects and the macro economy. So, we can't address equity as one category, as it is sector-specific," a ministry official told Business Standard.
The ministry will engage with debt funds from the Nordic countries, West Asia and Australia in a big way, as its liberalisation of debt markets has not met with much success so far.
| ACTION PLAN |
|
The stock exchanges have lined up meetings with FIIs next month. The investors will also meet Finance Minister P Chidambaram and Economic Affairs Secretary Arvind Mayaram.
The ministry hopes the impact of QE tapering would be less under Janet Yellen, likely to take over as US Fed chairman in January 2014.
India is planning to get its debt included in global indices including the ones run by JPMorgan and Barclays. Reserve Bank of India (RBI) Governor Raghuram Rajan also said the central bank would have conversations with international index agencies and some of the investment banks that create these indices.
According to a Reuters report, JPMorgan local debt indices, known as the GBI-EM, were tracked by almost $200 billion at the end of 2012. So, even very small weightings in such indices will give India a welcome slice of investment from funds tracking these.
At present, India has a $30-billion cap on the volume of rupee bonds that foreign institutional investors can buy, a tiny proportion of the market.
The existing restrictions are complicated and the caps have left India less open to foreign debt investment compared to other emerging market economies, according to a research paper authored by two Securities and Exchange Bureau of India (Sebi) members. The paper clarifies these are not official views of Sebi.
The window available to the government to take some measures is only between now and December.
According to an official not much can be done, particularly if tapering starts in April, which will be close to elections in India. "If the tapering happens in April, the CAD (current account deficit) will be behind us."
Ministry officials said efforts would be made to raise forex reserves to $300 billion, which would not need much as these already stood at $281.12 billion on October 18.
The reserves rose $1.88 billion for the week under review. About 10 weeks are left for the calendar year to end. If the addition of $1.88 billion is maintained, forex reserves could touch $300 billion by the year-end, analysts pointed out. They added that narrowing of the trade deficit and CAD would require less forex outflow.
The CAD is targeted to come down to $70 billion in 2013-14 against $88 billion in 2012-13. Although many analysts believe it would be less than $70 billion, the finance ministry is still pegging it at the targeted level. At $70 billion of CAD, India would need $8 billion to draw down from forex reserves to finance it, according to estimates by the Prime Minister's Economic Advisory Council.
Officials said RBI should have added more to forex reserves in past years. This was also a point raised by noted economist Arvind Panagariya against former RBI governor D Subbarao.
Panagariya, professor of economics at Columbia University, had said Subbarao's tenure was "one of the worst eras of performance by an RBI governor".
During a meeting of the Financial Stability and Development Council last week, Chidambaram had asked financial sector regulators to take preventive steps before the stimulus rollback by the US Fed starts.
The Federal Reserve had deferred QE tapering, which would lead to outflow of funds from emerging markets such as India, in September.
According to analysts, whenever the Fed hinted at a QE taper, equity markets here came under selling pressure. On May 22 this year, Federal Reserve Chairman Ben Bernanke had told the US Congress that the Fed may taper QE in the coming months. The very next day, the Nifty fell 2.09 per cent or 127.45 points to end at 5,967.05, its biggest daily percentage fall since May 8, 2012. The Sensex, too, fell 1.93 per cent or 387.91 points to end at 19,674.33 that day.
The Federal Open Market Committee (FOMC) will now meet towards end of this month and in December. However, most analysts do not see the tapering coming by this calendar year.
