DOHA: The problems that are pushing the Indian currency down are of India’s own making and the Indian government is wrongly blaming external factors for the malaise. The outside factors are only accelerating the currency’s slide, said a report.
A Saxo Bank report has blasted the Indian government and said its weak policies were actually responsible for hammering its currency down to alarmingly low levels.
The external factors the government is trying to blame the problem on are only accelerating the slide.
The report by Rudra Dalmia mailed to this newspaper yesterday said the Indian government tries to show that the rupee is being weakened by externalities, like tapering off QE and poor global conditions which have hit all emerging markets.
The reality, though, is that the externalities are only multiplying the effect of the poor policy making and governance of the current government.
“We believe the weakening of the Indian rupee started with the breakdown of confidence in the Indian policy-makers and the seeds were sown when some of the largest FDI investors were not given their due after winning a tax case in the Supreme Court of India in January 2012.” The (then) finance minister decided to be short-sighted in his view and opened a Pandora’s box of retrospective amendments to the law. Then came the scandals which created so much media scrutiny and political interference for investors in businesses which were well-intended but poorly sold (by the government) to domestic and foreign investors in telecom, infrastructure, coal, real estate sectors, among others.
Subsequent external events have led to further erosion of confidence in Indian policy-makers which is reflected in the rupee.
Investors can deal with commercial and business uncertainty, but no investor likes to have a target on their back for tax collections and policy uncertainty. The Vodafone and 2G Spectrum cases caused a ripple across interested investors all over the world, the report said.
Today, not a single law firm or accounting firm can issue a clear and definitive opinion on issues like — investor protection, exits, tax implications, land acquisition, employee liability, governmental interference in the name of corruption charges, etc.
“As long as the legal system cannot give clarity to investors on relevant issues, we will not see any interest in investing in India.”
India was a hot market for foreign institutional investors (FIIs) until last year (2012) but a majority of FIIs are fickle and have no long-term commitment to India, the ‘hot’ money left when the capital started migrating back to the western world in a matter of days or weeks.
On the other hand, the real long-term investors and value creators — the FDI investors, were systematically spooked by the extremely poor management of the finance and commerce functions of the Indian government, “so we have little or no long term money being committed to India”.
Add to all this — the US Treasury tapering of QE, further mismanagement of National funds reflected in the Current Account Deficit, extreme inaction in policies to change the subsidy regime of basic things like diesel and gas, the high inflation rate, the tightening of funds by the RBI (India’s central bank) which prevents any investment in growth, and the whopper - the creation of the politically-motivated Food Security Bill which puts a minimum of 25-30 Billion dollar burden on the government every year. The rupee is only going in one direction.
Meanwhile a Reuters report later yesterday said that India’s central bank would provide dollars directly to state oil companies in its latest attempt to shore up the currency.
The Reserve Bank of India announced late yesterday a special window “with immediate effect” to sell dollars through a designated bank to Indian Oil Corp Ltd, Hindustan Petroleum Corp, and Bharat Petroleum Corp “until further notice”.
The RBI last opened such a window during the 2008 global financial crisis, although it had been widely expected to re-implement the measures after last month telling oil companies to buy dollars from a single bank.
The steps are the latest in a series of extraordinary measures undertaken by the RBI to combat a currency fall of more than 20 percent this year, by far the biggest decline among the Asian currencies tracked by Reuters.
State-run companies are the biggest source of dollar demand in markets — worth $400m to $500m daily — and directing them to a special window is meant to reduce pressure on the rupee, which fell as much as 3.7 percent to an all-time low of 68.85 yesterday, recording its biggest one-day fall in 18 years.