new inr view-hdfc bank

7/29/2019 New INR View-HDFC Bank

1/4

22-October-08

No full stops for the INR

There are no guarantees in these troubled times. Much that we wish for stability in the

global and local markets, we recognize that the volatility that has been buffeting the

financial system is far from over. Emerging markets, irrespective of size, structure and

creed will continue to face selling pressures across asset classes and India is unlikely to

be the exception. The balance of flows to and from India is clearly biased against the

INR and we see the distinct possibility of it breaching the 50/USD mark in the next

couple of months, if not days

More specifically, we see the following risks for the INR

De-leveraging by global financial institutions is likely to continue. Frozen global

credit markets have resulted in an acute dollar shortage. Therefore, most

financial institutions are using emerging markets as a spigot of dollar liquidity to

meet their capital and liquidity requirements. This means that all emerging

market currencies will be offered as long as the de-leveraging continues. The INR

is unlikely to buck the trend.

Of the various investor classes, hedge funds are perhaps facing the most acute

redemption pressures. Hedge funds have sizeable investments in Indian equities

and are likely to be large sellers in the local markets. (Estimates suggest that

about 40 per cent of flows in 2006 and 2007 into India equity markets came

through the Participatory Note Route associated typically with hedge funds.

While some outflows would have taken place with the curbs on P-Notes, hedge

fund presence is still substantial)

While about $ 12 bn of FII equity investments have left Indian shores since

January 2008, there is a still about $ 54 bn of equity holdings of FIIs that can

potentially feed redemption needs of investment funds

The problem of running a current account deficit as opposed to a surplus that

many of Indias emerging market peers hold is likely to become particularly

critical in times when the capital account faces extreme stress. Short term debt (by residual maturity) is a massive $89 bn and is due for

repatriation over the next 12 months. Of these, NRI desposits could be rolled

over and might provide some relief but the other components of this debt will be

a drag on the INR.

Indias fiscal situation has seen considerable deterioration in FY09 on the back of

measures like the bank loan waiver for farmers and salary hikes for government


2/4


3/4

External balances may have worsened but the large stock of dollar reserves that have

built up over the past few years are an adequate safeguard, we argue, against a BOP

crisis. Our analysis of the forex reserve position of the country and the stress on its

external account spurred by short term outflows that have accelerated recently (and are

likely to remain strong in the future) suggest that there is significant buffer for now.

Fig.1:Indias BOP vulnerability has declined

0.0

50.0

100.0

150.0

200.0

250.0

2000-

01

2001-

02

2002-

03

2003-

04

2004-

05

2005-

06

2006-

07

2007-

08

2008-09Q2

USD

bn

Buf fer Stress Poly. (Buf fer)

Source: RBI and HDFC Bank

Growth has indeed moderated and is likely to slow down further over the next year.

However the prospect of severe downturn in the business cycle or a recession seems

likely. Recent data prints (like the August industrial growth numbers) have led to

concerns about sharp deceleration. The recent squeeze in inter-bank markets and

liquidity has perhaps exaggerated the concerns. However other indicators do not seem

to suggest that the slowdown has been as acute. Credit off-take data, for instance, and

our monetary conditions index (MCI) suggest that while growth has indeed come off

there is no indication of a severe slowdown. With inflation risks abating as global

commodity prices fall, the central bank is aggressively expanding money supply and

infusing liquidity. That should, with a lag, help in setting a floor to growth. We forecast

a 7.3 per cent real GDP growth for FY09 and 6.8 per cent for FY10

These fundamentals maybe ignored as long as the contagion effects of the global

financial meltdown dominates. But it might become important as the global economy

dips decisively into a recession. Once the uncertainty abates and the US and Europe find

themselves at the bottom the cycle, investors will again seek yields and go long on

markets that offer relative insulation from the G-7 cycle. Indias fundamentals will thenguide currency direction. We expect this to happen by 2H CY2009 and support INR

appreciation. We see a 45-46/USD level by December 2009.


4/4

Forecasts for the USD/INR

Dec-08 52.00-53.00

Mar-09 50.00-51.00

Sep-09 47.00-48.00

Dec-09 45.00-46.00

Treasury economics research team

Abheek Barua,

Chief economist

Phone number: +91 (0) 124-4664327

Email ID: [email protected]

Shivom Chakravarti,Economist

Phone number: +91 (0) 124-4664356


Jyotinder Kaur,

Economist

Phone number: +91 (0) 124-4664338


Disclaimer:This document has been prepared for your information only and does not constitute any offer/commitment to transact.Such an offer would be subject to contractual confirmations, satisfactory documentation and prevailing market

conditions. Reasonable care has been taken to prepare this document. HDFC Bank and its employees do not accept any

responsibility for action taken on the basis of this document.

new inr view-hdfc bank

Documents