Of the major South Asian economies, only India remains standing. But the region’s largest economy is also faltering a bit.
Even after depleting 11% of its foreign exchange arsenal, the Reserve Bank of India has only managed to keep the rupee at an all-time low of around 80 to the dollar. Should New Delhi start applying for an IMF loan? Not so fast.
On the one hand, a strong dollar is not a big problem for balance sheets. Yes, Indian companies are adding pressure on the rupiah as they scramble to buy protection for their $79 billion in uncovered foreign debt. But about half of it – or $40 billion – is the responsibility of state-run borrowers. Their currency risk, as argued by RBI Governor Shaktikanta Das, can be absorbed by the government, although such an eventuality is unlikely to occur. As for reserves falling to $573 billion from $642 billion in October, “you’re buying an umbrella to use when it rains,” he said.
Governor Das failed to mention that he also has a raincoat handy against the heavy downpour caused by the relentless tightening of US interest rates. That would be India’s 18 million strong diaspora, the world’s largest community of people living outside their country of birth. Give them a juicy return and they will deposit hard currency term deposits with Indian banks, something they have done tirelessly in the past to get their homeland out of trouble.
Even better, wealthy non-resident Indians, or NRIs, will soon be hounded by their private bankers to take out low-cost loans and invest in India without any currency risk. In 2012, I saw a term sheet from a global bank offering to lend S$900,000 ($650,000) against S$100,000 of client equity. The total amount of S$1 million would be placed with an Indian bank as a non-resident foreign currency deposit. The annual return to the client, after paying the borrowing fee, was guaranteed at 10%, at a time when a Singapore dollar deposit was yielding 0.075%.
Then came fear of the mid-2013 taper and a severe shortage of dollars for India, Indonesia, Brazil, Turkey and South Africa – the economies of the “fragile five”, as Morgan Stanley called them. At the time, the RBI blessed this kind of leveraged dollar raising from the diaspora by offering Indian banks a bargain to exchange their foreign currency funds for rupees. Indeed, India fabricated its own private bailout with a difference: the creditors – the NRIs who act as fronts for the global banks – could only ask for their money; they couldn’t demand that the government spend less or open the economy to more competition, or impose any of those conditions that make sovereign nations resent the IMF.
Looking at the clouds gathering on the horizon, it might not be too soon for Das to start thinking of a similar plan B.
To some extent, the effort has already begun. After touching the patriotic hearts of NRI customers by telling them how their remittances are helping to create jobs and improve health and education facilities at home, the State Bank of India, the country’s largest lender, informs of the 2.85% it offers on dollar deposits. one to two years. That’s already generous: Hong Kong banks pay little more than 0.3% for 12-month US currency funds. The next step, after the 2013 playbook, would be for foreign banks to start funding NRIs so that instead of depositing, say, just $100,000, they could put up $1 million and get effect returns two-digit leverage.
Finally, the RBI could step in and offer to exchange the funds in dollars for rupees at a lower cost for borrowing Indian banks, which made the scheme a resounding success last time around.
India raised $26 billion via this channel in 2013, only a fraction of which was real NRI money, says Observatory Group analyst Ananth Narayan, a former Standard Chartered Plc banker. “The rest was overseas bank money lent to NRIs, coming in as NRI deposits.” From the country’s point of view, it was expensive. As Narayan notes in an article for the Moneycontrol website, India actually recouped three-year dollars at around 5%, a 4.35% spread over US Treasury yields at the time. “It was a high (if hidden) price to pay. A sovereign bond at this yield would have been a public relations disaster. Should the need arise again, it might be best to extend the cheap swap option beyond NRI funds to all dollars raised overseas for a reasonably long period, Narayan said. . This will help reduce the cost of the grant.
The bottom line, however, is that India is not in the same boat as its South Asian neighbors, even though it is in the same choppy waters. Bloomberg Economics raised its forecast for the upper end of the Federal Reserve’s key rate to above the consensus level of 5% by mid-2023. Such a hawkish response to US inflation could easily knock a few more rays from the RBI’s foreign reserves umbrella as it tries to keep the rupee from weakening too fast and too soon. But Governor Das knows the Diaspora raincoat is dry, just in case India needs it.
More from this and other writers at Bloomberg Opinion:
• The RBI is getting its way on rates. So far: Andy Mukherjee
• The follow-up to Lagarde’s “Whatever It Takes” is not yet a success: John Authers
• The Fed must overcome these four failures: Mohamed El-Erian
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services in Asia. Previously, he worked for Reuters, the Straits Times and Bloomberg News.
More stories like this are available at bloomberg.com/opinion