Mumbai: The markets and the rupee both gave a thumbs down to the latest announcement by the Reserve Bank of India to stem the currency’s depreciation. Investors were disappointed because the measures were just a quick fix and did not provide a long term solution for the sliding rupee.
The Reserve Bank of India increased the investment limit for foreign institutional investors (FIIs) in sovereign bonds to $20 billion from $15 billion and also raised the limit on overseas commercial borrowings to $40 billion from $30 billion. The central bank allowed sovereign wealth funds, multilateral agencies, endowment funds, insurance, pension funds and foreign central banks to invest in the Indian government bonds.
Currency analysts expect these measures to boost the rupee only temporarily. Tirthankar Patnaik, India Strategist and Chief Economist at Religare Capital Markets said, “The central bank’s move was too little and too late. Plus investors were expecting a host of measures.” Hopes were building up that government would announce measures such as introduce currency denominated bonds and raise the cap on government bonds by at least $10 billion.
Foreign institutional investment in rupee denominated debt has been high despite the currency’s weakness. Government bonds with no restrictions on residual maturity have seen higher utilization at around 90%. Bonds with residual maturity of five years have seen utilization at 70% as of May end, according to the SEBI website.
Indranil Pan, Chief Economist from Kotak Mahindra Bank said, “Increasing the cap in the government debt by $5 billion is not sufficient to turn the fortunes of the weakening rupee even though demand for bonds is high.”
The recent ratings downgrade by S&P and Fitch has painted a gloomy picture of the Indian economy which will not bode well for attracting new investment in the long term government paper. Moreover, there have been no crucial reforms to curtail the fiscal deficit and reduce the subsidy burden which hold a key to change the long term trend of the rupee. The currency will continue to remain under pressure, unless the fundamentals improve. Indranil Pan expects rupee to trade in the range of Rs 54-57 per dollar in the near term.
