$400 B and Counting: India Puts Up A Special FX Show
Current account deficit widens to 2.4% of GDP in June quarter; exports rebound in August
Gayatri Nayak & Atmadip Ray
Mumbai | Kolkata: Four years after a currency crisis singed Indian financial assets, the country’s foreign exchange reserves have surged to a record $400 billion, up 45% from the trough, bolstering the hope that there’s enough cushion to face any headwinds originating in global markets.
India now ranks eighth in foreign exchange reserves in a list that’s headed by China ($3.09 trillion) and Japan ($1.2 trillion).
The record amount of reserves accumulated, mainly through the flow of funds from portfolio investors and foreign direct investment in manufacturing as well as services, reflects the strength of India’s macro economy and investor faith in growth.
But the swelling dollar corpus has meant a stronger rupee, hurting exports amid rising imports, thus posing a currency manage- Foreign direct investment $ BILLION
Foreign portfolio investors $ BILLION
Valuation gain $ BILLION ment challenge for the Reserve Bank of India (RBI).
The current account deficit (CAD) widened to 2.4% of gross domestic product in the June quarter, up from 0.1% in the year-ago period, the central bank said. To be sure, a recovery in global demand helped India’s exports re- bound in August after slowing in July, the government said on Friday in a separate data release. But imports outpaced exports and grew 21%, widening the trade deficit to $11.6 billion from $7.7 billion in the year-ago period.
“Record high foreign reserves, mainly borne out of strong port- folio inflows, reinforce investors’ positive view on the economy, beyond the attraction of higher yields and a stable currency,” said Radhika Rao, economist at DBS Bank in Singapore. “With the central bank intervening heavily in the forwards space, the reserves stock is bound to climb further as those swaps mature.”
Foreign exchange reserves stood at $400.73 billion for the week ended September 8, RBI said on Friday. Of this, about 6% was contributed by currency movements with the dollar depreciating across a range of currencies.
India was among those at the receiving end of global financial turmoil in 2013 when then US Federal Reserve chairman Ben Bernanke roiled the markets with comments on the possible tapering of the quantitative easing that began after the 2008 global financial crisis.
(All data for April-June 2017)
“The company is currently actively working with the GoI (government of India), Panatone and HPIL to finalise the scheme of demerger and expects that the same shall be finalised sometime in the near future,” the company had said in its FY17 annual report.
The Tata group holds a stake of nearly 49% in Tata Communications through Panatone Finvest Ltd, an investment arm that holds over 30%, Tata Sons and Tata Power. According to a recent Morgan Stanley report, the potential beneficiaries of the property separation include the government (51%), minority holders who sold their stake to Tata in an open offer in 2002 (25%), and existing minority shareholders (24%). This last group include Life Insurance Corporation of India (LIC), Government Pension Fund Global, Baron Emerging Markets Fund and Amansa Holdings.
According to sources, the Tata group is expected to hold a 3-4% stake in the landholding company. It didn’t comment on its holding in this entity. The Tata Communications stock, which has risen nearly 13% in the past month, ended at Rs 707.50, up by 0.31%, on the Bombay Stock Exchange on Friday. Analysts at Morgan Stanley attributed the surge to the expectations of a settlement on the land. The Tata group acquired a 45% stake in VSNL in 2002 in two transactions — 25% from the government and 20% from shareholders via the open offer. As part of the divestment process, the government divided VSNL’s 1,500 acre landholding into two parts — one stayed with the telecom operator and the other went to what eventually became Hemisphere Properties in 2005-06. While the Tata group has over time consolidated its control over VSNL, it had to sign away rights to the surplus land holdings.