MUMBAI: The recent measures announced by the government to curb India’s current account deficit and stabilise the rupee, according to experts, are unlikely to result in any significant shift in fund flows in the immediate future.
Some of the measures announced by the government include review of mandatory hedging conditions for infrastructure loans, easing of external commercial borrowing (ECB) norms for manufacturing firm, removal of exposure limit for FPIs in corporate bonds and removal of certain restrictions while issuing masala bonds.
These measures as per government estimates is likely to bring in additional capital flows to the tune of $5-$10 billion.
“These measures are better suited when the sentiment in the global market is positive towards emerging markets and in general when it is relatively easy for emerging market corporates to raise money abroad,” said Abheek Barua, chief economist, HDFC Bank.
For example, he said the demand for masala bonds from offshore investors is generally driven by the stability of the rupee. In an environment, when the rupee is under pressure, foreign investor would not be much willing to increase its portfolio of rupee denominated assets.
“Similarly, a lot would depend on how quickly and easily the Indian corporates are able to garner additional short-term debt through ECBs or portfolio investments. We believe that giving additional exposure limits to FIIs might not be much helpful when they are already pulling out money from the Indian markets,” Mr Barua said.
HDFC Bank noted that some of the emerging markets are considered vulnerable because of the rising current account deficit and worsening short-term external debt situations. “Increase in short-term ECBs or FII exposure could lead to further worsening of vulnerability ratios and the global investors might actually take this negatively,” it added.
Ajay Bodke, CEO – PMS at Prabhudas Lilladher said that the measures signal the government’s intent to stem the panic that had gripped the currency market. However, he feels that the impact of most of these measures would be felt not immediately, but over the next few months.
“What the government needs to focus on is how to address the structural deficiencies that have plagued export competitiveness of various sectors and what has hampered indigenous development of sectors such as electronics and capital goods that has led to surge in their import adversely impacting trade and CAD. Rather than focussing primarily on how to fund the growing CAD, policy makers need to think on how to contain it,” he said.
