67% of foreign deals in August were asset sales

Large flows pose a challenge to managing rupee appreciation

The large inflow of foreign money in recent times is more likely to help deleverage indebted promoters than aid the setting up of new factories and other investments that could generate new jobs.

Around 67 per cent of the deals made in August were asset sales, shows an analysis of Bloomberg data. While this isn’t always the case (it was less than 1 per cent in July), there does seem to be limited incentive for foreign investment in the creation of new capacity that could generate new jobs.

Sreejith Balasubramanian, economist — fund management, IDFC Asset Management Company, said there does not seem to be a compelling case for greenfield investments that would involve setting up new factories, given the macroeconomic environment. Emerging markets like India are seen as riskier when it comes to setting up new businesses. This might be a headwind given the current sentiment. “People are generally risk-averse,” he said.

A number of recent deals have involved some deleveraging. The largest has been Reliance Industries’ series of deals netting investors in its Jio Platforms.

Promoters of the Emami Group have said they will look at stake sales to bring down leverage. They previously sold Emami Cement to Nuvoco Corporation.

Foreign money has also been flooding the share market. Foreign portfolio investors were net buyers with ~47,080 crore inflows in August. This influx of foreign capital makes it more difficult to manage the currency. Given the dollar inflow, the rupee could have easily touched 60 a dollar level if the Reserve Bank of India (RBI) hadn’t intervened, say currency dealers.

India’s foreign exchange reserves were $428 billion in August 2019. This figure has risen to $542 billion as of September 4, thanks to aggressive dollar buying by the central bank. That’s an increase of $114 billion. In contrast, the previous $100 billion rise in reserves took over four years, from January 2015 to August 2019.

However, the central bank indicated that it could be in favour of a relatively stronger rupee to curb imported inflation, mainly in the form of cheaper crude import.

RBI recently said the “recent appreciation of the rupee is working towards containing imported inflationary pressures”. The next day, September 1, the rupee closed 1.03 per cent up at 72.87 against the dollar. It has since weakened to 73.5 a dollar on September 16. At the current level of $542 billion, India’s foreign exchange reserves are enough to cover about 14 months of imports.

According to Soumya Kanti Ghosh, chief economic advisor to the State Bank of India (SBI), while large forex reserves act as insurance against exchange rate volatility, they result in the “familiar policy quadrilemma of financial integration, exchange rate stability, monetary policy independence and financial stability”.

There is also a cost involved because the central bank holds more low-yielding foreign assets.

Some of that impact was already visible in the annual accounts for 2019-20 (FY20). The annual yields of RBI assets were just 2 per cent in FY20, down from 2.6 per cent in FY19. The interest yield on its rupee assets declined to 3.4 per cent in FY20 from 4.6 per a year ago and 4 per cent in FY18. It was as high as 6.9 per cent in FY15.

This is despite RBI’S balance sheet expanding by at least 30 per cent in FY20. As a result, the surplus transferred to the government was ~57,128 crore in FY20, lesser than the budgeted ~60,000 crore.