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An announcement by RBI mid-week of a swap arrangement to meet the dollar demand of oil companies through direct sales via state-run banks brought some respite as oil company demand constitutes almost half the country’s import requirement. The rupee appreciated sharply thereafter closing the week at 65.70, though still down 3.5% for the week. As oil companies have no direct dollar earnings, this effectively means a drawdown from forex reserves eventually hoping for a revival of capital flows or substitution of maturing swaps through external commercial borrowings by oil companies. This, so far, apart from the domestic liquidity tightening, seems to be the most potent measure in term of stabilising currency markets, at least in short term.
In other developments, GDP growth for Q1FY14 came in at 4.4%, raising serious concerns on achievement of revenue targets. Passing of food security bill was another concern in terms of a drag on fiscal consolidation. In related development, fiscal deficit for the first four months of the year was 62.8% of the budget, compared to 51.5% in the same period last year and an average of 39% in last five years. While government remains confident of adhering to the target of 4.8% of GDP for fiscal deficit, the visibility on how it will be achieved, like for CAD, remains extremely poor. Rating agencies have begun to raise red flags on a possible downgrade.
While it is possible that after sharp corrections in the recent past and with incremental measures by the government, markets may turn slightly optimistic in the near term, also deriving strength from the hope that markets are fully pricing in a moderate tapering from the Fed and that the Fed may not actually taper as fast. FIIs though remain circumspect on India. A sharp contraction then would be the only exit out of current mess, possibly triggering another round of sell-off from FIIs thus creating a self-feeding loop. However, that remains an extreme scenario and one hopes that the government will take enough measures to preempt that eventuality; a small trailer of that we have seen in recent months.
Given the kind of Europe-like scenario now, the market will likely gyrate between hope and dismay alternatively for some time till some more confidence building measures take effect.
