A depreciating rupee, widening current account deficit (CAD), rising oil and fuel prices, hardening bond yields, no visible solution for global trade war concerns, US Fed increasing rates, FII’s pulling out money from emerging markets and the list of the headwinds goes on. You may have to rewind the clock at least to a decade ago, just after the global financial crisis of 2008 to when the macroeconomic conditions were as bad. The government and RBI have to tread a thin line in these times of concern. Intervention may be the outcry of the public at large, but such intervention at the cost of an increased fiscal deficit could be damaging in the larger scheme of things, especially since the fiscal deficit has already touched 86.5% of the budgeted estimate in the first four months of the current financial year itself.
A crisis of this magnitude requires an equally innovative solution. With this in mind, the country’s two top politicians i.e. PM Narendra Modi and FM Arun Jaitley met with the country’s top banking official, RBI governor Urjit Patel and several other important policymakers such as Economic Affairs Secretary, Subhash Chandra Garg to chart out a plan of action to encourage more dollar inflows and to curb the ever-widening CAD. A five-step plan was drafted and announced by the Finance Minister on Friday night after market close. We take a look at the fine print of this five-point plan.
- Manufacturing sector entities can now avail external commercial borrowings of up to 50 million $ with a minimum maturity of one year. Until now it was three years. Companies will now be able to raise dollar-denominated loans at a cheaper cost and roll it over quicker.
- Earlier the limit for foreign portfolio investors (FPI’s) to invest in debt securities/bonds of a single corporate group was 20% and that of a single issuance of corporate paper was 50%. These restrictions have been lifted. These limits were looked upon as restrictive and now funds can invest in debt securities with renewed interest and in accordance with their risk profile.
- Mandatory hedging conditions in case of external commercial borrowings for infrastructure loans will be reviewed. Presently hedging costs are approximately 4 – 4.5% of cost of borrowing. A revision of this condition will enable companies to raise dollar-denominated loans more comfortably.
- Withholding Tax requirement of 5% for Masala Bonds (rupee-denominated overseas bonds) are done away with for the current year ending 31st Mar 2019. Investors in overseas markets can now invest without worrying about the tax cut and the cost of issuing such bonds also reduces.
- There will be a removal of restrictions for market making in Masala Bonds including underwriting of such bonds by Indian banks. Indian companies can now go to local branches of Indian banks to manage masala bond issuances, also investor base for such bonds would widen.
Other than these five specific measures, the government has also decided to cut non-essential imports in consultation with other ministries and shore up exports to give the CAD a shot in the arm. These measures, according to the Economic Affairs Secretary Mr. Garg, were expected to increase inflows by $ 8 – 10 billion and let the public at large know that the government does not intend to leave them at sea and is serious about implementing measures to stabilize the rupee. Stock markets being the economic barometer of the country were expected to show buoyancy on the back of this crucial announcement. To the government’s dismay though, it didn’t go as per plan as the BSE fell 505 points and NSE fell 137 points which translates into a fall of greater than 1.2% on both indices after Monday’s trade. To add to the government’s woes the rupee did not see any significant change and is still hovering the 72.50 mark per dollar.
With so many macro concerns thrown into the foray at once, perhaps market participants only viewed these measures as the government signalling its intentions to curb speculation driving the rupee down and did not consider it to be big enough to calm their aspersions about the state of the economy as a whole.