Updated: May 9, 2015 12:25:11 am
For over a year, India was one of the best performing markets for both stocks and the domestic currency. Behind it, of course, was the hope that a new government led by a strong and decisive leader would revive growth and repair the damage to investor sentiment from the previous regime’s policy paralysis. In 2014 alone, foreign institutional investors (FIIs) picked up $42.4 billion in Indian debt and equities. In the current year, too, they pumped in another $15.2 billion till April-end. But since the start of this month, FIIs have been net sellers to the tune of $1.3 billion.
Meanwhile, the Sensex has shed nearly a tenth of its lifetime high of 30,000-plus points touched in early March and the rupee sank to a 20-month low of Rs 64.05 to the dollar.
In good measure, this reversal of fortunes has to do with structural factors. Poor corporate earnings — more so in the latest March-ended quarter — and over-leveraged balance sheets rule out any immediate revival in private investment activity. Pressure on rural incomes from falling crop prices and extreme weather, along with weak export demand, have only queered the pitch further. On top of these, global oil prices are on the boil once again, with the average price of crude climbing by around $10 a barrel in the last one month.
Although the RBI’s foreign exchange reserve position is vastly better than it was during the last run on the rupee in August-September 2013, one knows from the past how rising oil prices can be a source of vulnerability for India’s balance of payments situation. The pressure on the rupee now, if anything, queers the pitch for any interest rate cuts. The RBI was, in fact, forced to raise short-term rates the last time around to counter attempts by currency speculators to “short” the rupee.
The current government has only made things worse in a sense, through its confusing statements on retrospective applicability of minimum alternate tax on FIIs. Understandably, the latter haven’t taken too kindly to these, after being assured of this government’s determination to end tax terrorism and bury the ghost of the retrospective amendment.
Their heavy selling serves as a warning to the government, which was seemingly lulled into complacency by low crude prices, softening inflation and robust inflows. Thankfully, the wake-up call has come fairly early, before it completes even one year in office. Prime Minister Narendra Modi needs to take direct charge of things now and clearly convey that his government means business.