The Hindu : Heightened activity in forex market

Online edition of India's National Newspaper
Monday, Jul 14, 2003

Business

Business

Heightened activity in forex market

THE RECENT developments in the forex and money markets have brightened the prospects for the economy considerably in the current financial year. This situation has been brought about by the upsurge in forex reserves by $20.70 billion to $74.81 billion in 2002-03 against the addition of $11.83 billion in 2001-02.

The emergence of a bigger current account surplus of $3.71 billion in the past year against $1.43 billion, or $782 million after making adjustments for the depreciation of the U.S. dollar, in 2001-02 was responsible for the faster growth in reserves. Besides, the foreign institutional investors have been stepping up purchases of listed securities in the Indian bourses, while NRIs and others have been increasing their remittances for taking advantage of the higher interest rates in India.

As a consequence, the Indian rupee has been appreciating steadily, which in turn has led to faster repatriation of export earnings and remittances by expatriates. The Indian currency touched a new peak of 46.08 before closing at 46.11 vis-à-vis the U.S. dollar on July 11, showing an appreciation of 6 per cent since June last year.

The outlook for the current financial year is viewed with confidence in industry and stock market circles, as the progress of the monsoon has been satisfactory so far in many regions. As it is expected that there would be a sharp rise in agricultural production, the Gross Domestic Product may rise by even 6.5 per cent in the current financial year against the revised figure of 4.3 per cent for 2002-03 and 5.6 per cent in 2001-02.

The Finance Ministry has, therefore, decided to take advantage of the highly comfortable balance of payments (BoP) position and reduce further its interest burden on the external debt. The first major operation was carried out at the end of February this year with the earlier repayment of loans taken from the World Bank and the Asian Development Bank to the extent of $3.01 billion . The net increase of $20.70 billion in forex reserves in the past year is after repayment of the loans. There has, however, been a slight exaggeration in the value of reserves because of the depreciating dollar against other major currencies. Besides, the State Bank of India has decided to redeem the Resurgent India Bonds (RIB) outstanding for $5.5 billion on a staggered basis and this operation is not expected to create any stringency in forex or money markets though it may be contended that in terms of rupee the redemption will be costlier. This is because even with the recent appreciation of the rupee, there will be a net decline since 1998. Fresh additions to forex reserves in July August may get smothered or absorbed more than fully by the net outflows that may take place as a result of the redemption of the Resurgent India Bonds.

Major move of the Government

The Exchequer also decided to utilise forex worth Rs.7,491 crores for repaying loans taken from 14 countries, as already stated. While the adjustments in this regard are yet to be finalised, the Government decided to contribute $2.91 billion or 2.05 billion SDRs in two tranches to the International Monetary Fund and change its status to a creditor from a debtor. The required forex has been secured from the Reserve Bank. No rupee loans were issued immediately as done earlier for an equivalent amount.

Only on July 1, three loans were raised for Rs.12,000 crores _ Rs. 3,000 crores more than the notified original amount. All the loans were heavily oversubscribed and the cut off yields also were lower than those for analogous loans earlier. In spite of the reported shortfall in tax revenues from visualised levels because of heavy refunds to corporate assesses, the net borrowing has not risen uncomfortably.

Even if the Exchequer has to exceed the target of Rs.1,07,194 crores for net borrowing in 2003-04, with the swap operations also necessitating additional mobilisation , the cost of fresh borrowing is likely to be much lower than in earlier years.

With a persisting downtrend in interest rates all round, it is being discussed in banking and money market circles whether Bimal Jalan, Governor of the Reserve Bank, will effect a fresh cut in the Bank Rate to 5.75 per cent or even 5.50 per cent against six per cent prevailing now. However, in view of ample availability of rupee funds, a concurrent reduction in the cash reserve ratio by 0.25 per cent or 0.50 per cent from the present level of 4.5 per cent may not be necessary. The expectations in this regard have been strengthened by the latest decision of the U.S. Federal Reserve Board to reduce its interest rate by 0.25 percentage point to one per cent, the lowest level for 45 years.

Bullish sentiment in bourses

The happenings in the money and stock markets in the second half of the current year may thus be refreshingly different from those of the past two years. Already there has been a sustained bullish sentiment in the secondary markets with the BSE index registering handsome gains week after week. Even with profit taking, the index finished at 3676.26 on July 11, representing a gain of nearly 20 per cent in three months.

The buoyant secondary market and improved availability of investible funds have been helpful to the Government in making a spectacular success of its disinvestment of 27.5 per cent out of its holdings in Maruti Udyog, with the issue being oversubscribed by ten times. The Finance Ministry could, thus, secure a rate of Rs.125 against the prescribed minimum of Rs.115. Since the quotation for the scrip is 20 per cent higher than the book building price, the Government is contemplating to hive off entirely its holdings in five public sector enterprises in consultation with the new managements. The target of Rs.12,000 crores under the disinvestment programme for the current financial year can be realised assuming that there will not be any serious opposition from the Members of Parliament to strategic offers of portions of government holdings.

The improvement in India's creditworthiness in world markets and the brightening prospects for the current financial year have also encouraged mergers and de-mergers with even foreign interests seeking to increase their stakes in industrial, banking and finance companies. The question now is whether the appreciation in the external parity of the rupee will be unchecked and the export effort rendered difficult in the bargain.

However, with a lowering of interest rates and a declining trend in the inflation rate, the growth in exports may be satisfactory and the trade gap for the whole of 2003-04 may not rise significantly even with higher non-oil imports. The oil import bill may not be increasing, as world crude prices may decline in later months with an increase in exports of crude from Iraq.

Centre should step up Plan outlays

The various economic indicators have, thus, been heartening and if the monsoon behaves satisfactorily in July-August, the yields of food and cash crops may exceed even the all time record of 2001-02.

If the Central Government and the Planners can utilise the new opportunities for increasing plan outlays, the adverse effects of the poor start for the Tenth Plan can be overcome to a great extent.

P. A. Seshan

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