Home / Industry / Manufacturing /  BofA sees rupee drop creating China alternative for US firms

Mumbai: Bank of America Corp. (BofA), India’s top-ranked takeover adviser, says the rupee’s depreciation is generating interest from US companies for setting up factories in Asia’s third-largest economy.

“Rupee trading at between 60 to 62 per dollar will lure overseas firms to invest in India," Kaku Nakhate, president and country head for Bank of America, said in an interview. The rupee has fallen 16% in the past 12 months making it the worst performing major Asian currency after the yen and rupiah.

“US companies are looking for an alternative base in Asia outside China and India fits the bill," said Nakhate. “We are getting many inquiries from them. They want stability of rules in areas including land acquisition and taxes."

“The rupee’s drop is making India a more attractive destination amid rising wages in China and labour strife in Bangladesh. To benefit from the currency advantage, India will have to ease rules and reduce bureaucratic delays," said Vikas Halan, a senior analyst with Moody’s Investors Service. Companies in India face more red tape than in Zimbabwe and Haiti, according to the World Economic Forum.

“I remain skeptical of the situation in India," said Singapore-based Halan at Moody’s, which rates India at Baa3, the lowest investment grade. “Most manufacturers in India are not doing well compared with China because of structural issues such as labour laws," he said.

China, the world’s second-largest economy, is targeting a 7.5% growth this year. India’s central bank forecasts the $1.8 trillion economy will expand 5.5%, while Goldman Sachs Group Inc. predicts a 4% growth.

Competitiveness ranking

India ranks 104 in the World Economic Forum’s Global Competitiveness Index for burdensome bureaucracy, while China is ranked 14. India’s overall position in the competitiveness index fell to 60 in the 2013 report. The nation has lost 15 places since 2006.

Delays in getting mining rights prompted ArcelorMittal, the world’s biggest steelmaker, and Posco to scrap 72,000 crore ($11.7 billion) of projects in Odisha and Karnataka states respectively.

India is also seeking about $2.2 billion in taxes from Vodafone Group Plc following its purchase of Hutchison Whampoa Ltd’s business in the nation. The Supreme Court ruled in January 2012 that the operator isn’t liable and dismissed the government’s case. Former finance minister Pranab Mukherjee amended the tax law in March 2012 to revive the claim.

‘Lot of harm’

“The Vodafone tax case did a lot of harm to India’s reputation as an investor friendly destination," Sanofi chief executive officer Chris Viehbacher said on 30 September in Mumbai. The French drugmaker has disputed a claim by tax authorities to pay dues following the acquisition of India’s Shantha Biotechnics Ltd.

The rupee strengthened the most in two weeks to 61.74 per dollar on Thursday as US lawmakers’ failure to resolve a budget impasse damped demand for the dollar.

Prime Minister Manmohan Singh has eased rules to allow foreign carriers buy stake in local airlines and overseas retailers own 51% of local companies to lure inflows and boost the rupee, which plunged to a record 68.8450 per dollar on 28 August. It has recovered 10% since then.

“The currency’s current level will help India become an automobile manufacturing hub," Nakhate said.

“Carmakers including Maruti Suzuki India Ltd plan to cut use of imported parts by 3 percentage points this year," chief financial officer Ajay Seth said on a 25 July conference call with analysts. “The company imported 19.5% of its raw material as of 31 March," he said.

China costs

“International companies that have set up manufacturing facilities in India will have to use more local products as rupee weakens," Nakhate said. “That will build capability, there will be more exports, which will help to cut the current account deficit."

“Higher costs in China are leading some labour-intensive manufacturers to look for alternatives, creating a huge opportunity for India," S. Gopalakrishnan, president of the Confederation of Indian Industry, said on 30 August.

Average inflation-adjusted wages have more than tripled in a decade and non-wage costs for procedures such as hiring and firing have risen since the introduction of a 2008 labor law, the Asian Development Bank said in a report published in April.

“The recent stability in the Indian currency is also prompting international funds, which had exited the Indian market five years ago, to return," Nakhate said, echoing similar views by Prashant Jain, chief investment officer at India’s biggest money manager, HDFC Asset Management Co.

‘Bombed out’

“India may have seen the worst of capital outflows as the rupee stabilizes and rising exports aid corporate earnings," Jain said in an interview broadcast on Bloomberg TV India on 30 September.

Foreign funds bought a net $2.1 billion of local equities in September, the first monthly net inflow since May, after the central bank governor Raghuram Rajan outlined plans to bolster the rupee when he took charge 4 September and the Federal Reserve decided to maintain economic stimulus.

Large funds are saying it is a bombed down market and the worst is over, said Nakhate They are willing to come in with a two- to three-year perspective as they believe this cannot last for ever.

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