Doubly Damned

A PRES le budget, le deluge. First a rupee and stock slide, then the US sanctions, then a Moody'sexpected but severe—downgrade, and then a fresh bout of stock and rupee slide. The rupee is now halted, painfully, at Rs 42.62 to a dollar (from Rs 39 pre-budget) and the sensex pulled back, from below the psychological barrier of 3000, to 3200-odd. Finally, about a month after the historic budget that sent most investors' adrenalin way down, a silver lining may be in sight—signs of Noah-like salvage operations by the government.

Says David Levey, managing director, sovereign risk unit of Moody's Investor Service: "I think there were some legitimate concerns about this particular government and its budget as whether there was really a clear direction of policy and whether investors were being given the right signals. We ended up finding that the situation appeared to be a little bit more risky than before and that's why we downgraded." Though finance secretary Montek Singh Ahluwalia said that "they have been wrong before and I hope they are wrong this time", US bankers and analysts privately admitted that they took Moody's evaluation of India seriously and gave the agency high marks for its professionalism.

Says a US banker: "I don't see a change in ratings by Moody's quickly. The Indian government seems to think it will change in three months, but the environment in Asia is negative. Many in India think they are so closed that they won't be affected. This is not true. I expect a redirection of investments." Adds an India-watcher in a financial institution: "In my view, Moody's perhaps were too high in their ratings to begin with. They became uncomfortable and put India under review list as they looked into India's policy drift. My guess is that Moody's would have wished that they'd brought down the ratings last year."

If on Wall Street, there was general agreement that the Moody's report card would influence the thinking of foreign investors, at the annual Euromoney conference in New Delhi on June 25, you could cut the gloom with a knife. Especially after finance minister Yashwant Sinha, the chiefs of IDBI and ICICI, and the big names in FIIs—J.P. Morgan and Jardine Fleming were present but they were the conference sponsors—were conspicuous by their absence. Montek Singh Ahluwalia salvaged the mood by giving as many broad hints to further reforms as possible: flag-off to public sector disinvestment drive after August, strategic sell-off of five PSUs, early return of buyback of shares (the market's pet demand), etc. Earlier, a cabinet committee also cleared corporate proposals for $500 million of external commercial borrowings.

But more than the finance ministry, the PMO is believed to be grappling with a much liberalised foreign direct investment policy to minimise the effect of sanctions. This would involve opening up and liberalising rules in technology, food and supplies handling, civil aviation, coal, and water resources. As if to lend support to government efforts, on June 26, the World Bank in Washington cleared the $543.2 million economic restructuring loan for Andhra Pradesh, effectively settling the worry on whether loans to meet basic human needs (read, social sector projects) would go through.

Is the worst over? It's certainly high time. The economy is probably scraping the bottom of the barrel, and economists fear that unless some major boosters are announced shortly, post-Pokhran Indian economy may soon slide beyond control.Says Ravi Nursey, head of treasury, Dresdner Bank: "The exchange and the interest rates weave the fabric of an economy. You have to handle them with kid gloves." And, if you look at the capitalisation figures for the Bombay Stock Exchange, the mirror of investment decisions and mood-swings, it's clear that the weaving has indeed gone awry.

Between April 21 and June 22, the stockmarkets lost a capitalisation of over Rs 100,000 crore, wiping out 80 per cent of the gains notched in the previous three months. Thanks mainly to the FIIs, whose grip on a thinning market has tightened in the past two years. In April and May, FIIs sold almost Rs 1,000 crore. After the Moody's downgrading of India by two notches, to speculative grade from investment grade, the net FII outflow till June 22 reached $205 million. Cumulative FII portfolio investment has now dipped to $8.84 billion. Says James Marshall, head of South Asian Research, Nomura International, presently second to UTI Securities Exchange Ltd (where Nomura will pick up 49 per cent): "Bulk of the FII money is part of dedicated funds to India. Though they have been net sellers, it isn't that they are pulling the money out of the country permanently. It's more like they are waiting for the government's policies, especially after the downgrade."

Almost concurrently, the rupee dipped steadily, to have breached Rs 43 to a dollar at one point last week. Says Nursey: "Whatever bad news had to come in is already in. The problem now is how to ensure that cash flow in foreign currency is not affected. If the rupee continues to fall, exporters will stop coming in while importers will continue to panic." Adds K.N. Dey, senior vice-president, Mecklai Financial & Commercial Services: "The worst seems to be over, provided the finance minister or any other minister refrain from rhetoric and false bravado."

 In fact, the threat of sanctions pales in significance against the threat of a bigger fallout of the debt-currency-equities bomb exploding across Asia. Most of the region's stock exchanges are hovering around their January lows. And Japan, Asia's engine of growth, is heading towards a recession that may spin another crisis for the region. The yen has dived almost 10 per cent to Y140 against a dollar in less than a month.

As a result, post-sanctions, corporates, banks and most forex dealers are more than inclined to pick up dollars. And subsequent fire-fighting measures did little to inspire confidence. Says K.R. Bharat, managing director, Credit Suisse First Boston Securities: "Firefighting the stock exchange problem now is like prescribing Aspirin for a migraine that has now worsened to a blood-clot in the brain (see interview)."

 As for the rupee, bankers are now estimating a new platform of Rs 44. Says Bharat: "In a six-month time-frame, the rupee may go down to Rs 45, but it all depends on what steps the government takes to reverse the lack of confidence." Even as the rupee looks up and SEBI is slated to take off the ban on short sales on June 29, the panic remains. Says Marshall: "The sanctions will obviously increase the external commercial borrowings rate. Corporates have been asked to go in for domestic borrowings which will immediately put an upward pressure on interest rates, resulting in further slowdown. You need to create capital in the country." SBI chief M.S. Verma has already conceded a hardening of interest rates.

Says a Wall Street insider: "There's a huge worry as far India is concerned. First, borrowing for private companies could become more expensive. That means their plans for restructure are doubly hit. I expect the privatisation moves to be affected as well." And now with the entire region affected, India is viewed very negatively. Adds Nursey: "What India needs today is something drastic and revolutionary. It's still not too late." Like wooing foreign capital like never before, like spreading out its family silver of PSUs, like specific measures to retain the FIIs, like a wise measure of economic diplomacy. Hopefully, reality has dawned on North Block.

With Narayan D. Keshavan