Goldman cuts India's growth forecast
On a day that rupee fell sharply and stocks tumbled in another major sell-off caused by uncertainty in the Middle East, Goldman Sachs predicted that rupee was likely to reach Rs. 72 per dollar in six months’ time.
"In India, we have cut our full-year GDP growth forecast to 4%, from 6%,” Goldman Sachs said in a research note.
It added that the rupee was likely to reach 72 per dollar in six months' time, recovering to R70 over a 12-month horizon.
Goldman Sachs said there was a risk of "near-term overshooting of our targets if economic and financing conditions worsen, and especially if there are pressures on the banking and corporate sectors due to weakness in growth".
In the near term, Goldman Sachs sees risks as the economy is likely to need an adjustment in the current account and fiscal balances, and says it "may require below-potential growth for several more quarters to reduce inflation, before we can see an economic recovery".
Goldman Sachs joined a series of investment houses from HSBC to Nomura which have cut their growth forecasts for the once-booming Indian economy.
On Monday, an HSBC survey showed that India's manufacturing shrank in August for the first time in over four years.
The liquidity crisis: Foreign banks play and the nation pays--ET 05.09.2013
By: Nirmal Jain, Chairman, IIFL
In the last six weeks, RBI has resorted to unprecedented liquidity tightening to curb speculation in the currency market. One pertinent question is: who are these speculators misusing local liquidity to manipulate the currency? Primarily, five foreign banks. No Indian bank or domestic company can engage in such speculation. Here is how it works.
When foreign banks sense that the rupee is fragile, they buy forward dollars and sell the rupee in the non-delivery forward (NDF) overseas markets on their proprietary books. Typically, sellers of dollars in NDF market are Indian corporates with overseas subsidiaries, NRIs, Indian-origin diamond traders, etc, who then try to hedge by buying dollars in local market.
As the rupee weakens, many exporters extend their credit periods and importers contract them. Foreign banks then use local liquidity to further go long on dollars on the pretext of hedging their custody assets. Typically, they use overnight indexed swaps to pass on the interest rate risk to PSU banks and get their borrowing costs fixed. Many of these foreign banks use their public relations network and research reports from their own houses to influence policy makers' thinking to not intervene in the currency market.
As a matter of fact, most of the foreign banks globally and in India, too, employ kin of policy makers and government officials with generous compensation. China is investigating such employments.
The fact is that RBI reserves cover more than 18-24 months' trade gap (excess of imports over exports) as we are not shutting down our exports tomorrow. Also, regulators world over do intervene to ensure healthy functioning of the markets. The same foreign banks have different prescription in their own home countries.
Actually, no speculator can match RBI's reserves and strength. If RBI can manage a surprise swift operation in currency by selling say $20 billion, it can wipe out all the speculators. All traders and speculators essentially work with stop-loss whereas RBI has no such restrictions. One may argue whether it is appropriate for RBI to do so, but consider the cost of not doing so.
When RBI intervenes with paltry $100 million, traders at desks of foreign banks, have a good laugh. Who pays the price? The entire nation. Given the multiplier impact of cut in money supply, the banking system seems to have run out of money.
It impacts lakhs of enterprises and crores of people. Banks have been refusing to disburse even the sanctioned loan and not allowing withdrawal from cash credits/overdraft limits. The abrupt disruption in the flow of liquidity causes heart attack-like situation for many otherwise healthy businesses.
Imagine if all deposit holders of the banks were not to renew their deposits or ask for their money back overnight. No bank would survive such a scenario. Many enterprises are not able to pay their creditors in time and many others have been forced to abruptly halt their projects. Banks are also facing risks of increased NPAs and losses. While they will defer booking of losses on G-Secs by treating them as HTM (holdto-maturity), confidence of individuals and mutual fund G-Sec investors is irreparably shattered. It will not be fair to blame the RBI or the government for the current situation.
In the last six weeks, RBI has resorted to unprecedented liquidity tightening to curb speculation in the currency market. One pertinent question is: who are these speculators misusing local liquidity to manipulate the currency? Primarily, five foreign banks. No Indian bank or domestic company can engage in such speculation. Here is how it works.
When foreign banks sense that the rupee is fragile, they buy forward dollars and sell the rupee in the non-delivery forward (NDF) overseas markets on their proprietary books. Typically, sellers of dollars in NDF market are Indian corporates with overseas subsidiaries, NRIs, Indian-origin diamond traders, etc, who then try to hedge by buying dollars in local market.
As the rupee weakens, many exporters extend their credit periods and importers contract them. Foreign banks then use local liquidity to further go long on dollars on the pretext of hedging their custody assets. Typically, they use overnight indexed swaps to pass on the interest rate risk to PSU banks and get their borrowing costs fixed. Many of these foreign banks use their public relations network and research reports from their own houses to influence policy makers' thinking to not intervene in the currency market.
As a matter of fact, most of the foreign banks globally and in India, too, employ kin of policy makers and government officials with generous compensation. China is investigating such employments.
The fact is that RBI reserves cover more than 18-24 months' trade gap (excess of imports over exports) as we are not shutting down our exports tomorrow. Also, regulators world over do intervene to ensure healthy functioning of the markets. The same foreign banks have different prescription in their own home countries.
Actually, no speculator can match RBI's reserves and strength. If RBI can manage a surprise swift operation in currency by selling say $20 billion, it can wipe out all the speculators. All traders and speculators essentially work with stop-loss whereas RBI has no such restrictions. One may argue whether it is appropriate for RBI to do so, but consider the cost of not doing so.
When RBI intervenes with paltry $100 million, traders at desks of foreign banks, have a good laugh. Who pays the price? The entire nation. Given the multiplier impact of cut in money supply, the banking system seems to have run out of money.
It impacts lakhs of enterprises and crores of people. Banks have been refusing to disburse even the sanctioned loan and not allowing withdrawal from cash credits/overdraft limits. The abrupt disruption in the flow of liquidity causes heart attack-like situation for many otherwise healthy businesses.
Imagine if all deposit holders of the banks were not to renew their deposits or ask for their money back overnight. No bank would survive such a scenario. Many enterprises are not able to pay their creditors in time and many others have been forced to abruptly halt their projects. Banks are also facing risks of increased NPAs and losses. While they will defer booking of losses on G-Secs by treating them as HTM (holdto-maturity), confidence of individuals and mutual fund G-Sec investors is irreparably shattered. It will not be fair to blame the RBI or the government for the current situation.
Under the circumstances, the decision to tighten liquidity was taken with good intention. With hindsight, we know it has not only failed to deliver the desired results, but has also caused a huge collateral damage.
To fix a problem created by a few miscreants, the action seems to be crippling the entire system. We have seen rare simultaneous spooking of equity, debt and currency (rupee) markets, all witnessing much sharper fall after the tightening. This has aggravated the outlook for the economy as well as Indian corporates, scaring foreign investors of equity as well as debt.
The RBI should be quick to reverse these decisions. We should listen to our own senior bankers, for example, the chairman of our largest public sector bank who advised "hike the rate but don't choke liquidity" or the ex-chairman of the largest private bank who warned against using outdated text-book approach.
To fix a problem created by a few miscreants, the action seems to be crippling the entire system. We have seen rare simultaneous spooking of equity, debt and currency (rupee) markets, all witnessing much sharper fall after the tightening. This has aggravated the outlook for the economy as well as Indian corporates, scaring foreign investors of equity as well as debt.
The RBI should be quick to reverse these decisions. We should listen to our own senior bankers, for example, the chairman of our largest public sector bank who advised "hike the rate but don't choke liquidity" or the ex-chairman of the largest private bank who warned against using outdated text-book approach.
Déjà Vu: Only way out of the crisis for UPA is to seek a fresh mandate
By: Yashwant Sinha
During the last two years, the UPA government postponed tough decisions and invited a full-blown economic crisis. We are plunging into a downward economic spiral, such as in 1990 and 1998. It is deja vu all over again. Several Congressmen have attacked me for being critical of the UPAgovernment, but I have to speak up in the national interest. The lessons of 1984-89 and 1996-98 have been forgotten.
Then, we had governments that hoped to use fiscal populism to improve their chances in impending national elections. GDP growth slowed due to policy paralysis, inflation shot up, the fiscal deficit and the current account deficits became unmanageable. Once foreigners stopped funding our profligate ways, we had no choice but to depreciate the rupee, seek foreign loans with strings attached, raise interest rates and practice fiscal austerity. Indians suffered from higher prices, fewer jobs and lower quality of life.
I know this because I was the finance minister in 1990 and 1998. When the NDA came to power in 1998, we resolved to address the chronic macroeconomic problems that India had faced since Independence: slow growth, high inflation, high interest rates and recurring balance-ofpayments crisis. The only way to address these chronic problems was to invest in building India's national strength: our key industries, infrastructure, education and so on. Despite many trials and tribulations like the Asian financial crisis and the economic sanctions after Pokharan II, we managed to accomplish all this and left the nation stronger than we had inherited.
Operation Demolition
During the UPA's nine years in power, I have watched with concern the demolition of all the achievements of that era. The government let the economy drift and deferred making policy decisions. For example, we have not implemented the Direct Taxes Code or the goods and services tax. Our financial institutions are again afflicted with high bad debts. We have not freed oil marketing companies to deal with oil subsidies.
PSUs have been further shackled and their position has eroded. Tax policies have been capricious. Corruption has been the fatal blow to the economy. The UPA government has been the most corrupt in Indian history. We seem to have become a country where everyone believes that it is fine to lie, cheat and steal. From the lowest to the highest, everyone is working some deal to line their pockets.
Opaque allocation of coal, iron ore and spectrum has led the Supreme Court to shut down all such allocations. Multinational companies are losing faith in India. They believe that their money and assets are not safe here. In some cases, their own Indian executives swindle money and cook the books. Foreign investors found that many promoters that they regarded as daring entrepreneurs were actually crony capitalists paying off government officials to gain unfair advantage. In fact, corruption has led many good Indian companies to decide to invest abroad. With elections looming and growth slowing, the UPA decided to embark on several massive entitlement programmes.
With mining shut down and coal being imported, the current account deficit has shot through the roof and put pressure on the rupee. Inflation is surging and people are buying gold, since they do not trust the financial system to protect their assets. These policies will make India vulnerable to external shocks that could easily trigger another balanceof-payments crisis. But the government does not care. Once the US Fed announced that it was considering tapering its quantitative easing, the crisis was bound to hit India.
During the last two years, the UPA government postponed tough decisions and invited a full-blown economic crisis. We are plunging into a downward economic spiral, such as in 1990 and 1998. It is deja vu all over again. Several Congressmen have attacked me for being critical of the UPAgovernment, but I have to speak up in the national interest. The lessons of 1984-89 and 1996-98 have been forgotten.
Then, we had governments that hoped to use fiscal populism to improve their chances in impending national elections. GDP growth slowed due to policy paralysis, inflation shot up, the fiscal deficit and the current account deficits became unmanageable. Once foreigners stopped funding our profligate ways, we had no choice but to depreciate the rupee, seek foreign loans with strings attached, raise interest rates and practice fiscal austerity. Indians suffered from higher prices, fewer jobs and lower quality of life.
I know this because I was the finance minister in 1990 and 1998. When the NDA came to power in 1998, we resolved to address the chronic macroeconomic problems that India had faced since Independence: slow growth, high inflation, high interest rates and recurring balance-ofpayments crisis. The only way to address these chronic problems was to invest in building India's national strength: our key industries, infrastructure, education and so on. Despite many trials and tribulations like the Asian financial crisis and the economic sanctions after Pokharan II, we managed to accomplish all this and left the nation stronger than we had inherited.
Operation Demolition
During the UPA's nine years in power, I have watched with concern the demolition of all the achievements of that era. The government let the economy drift and deferred making policy decisions. For example, we have not implemented the Direct Taxes Code or the goods and services tax. Our financial institutions are again afflicted with high bad debts. We have not freed oil marketing companies to deal with oil subsidies.
PSUs have been further shackled and their position has eroded. Tax policies have been capricious. Corruption has been the fatal blow to the economy. The UPA government has been the most corrupt in Indian history. We seem to have become a country where everyone believes that it is fine to lie, cheat and steal. From the lowest to the highest, everyone is working some deal to line their pockets.
Opaque allocation of coal, iron ore and spectrum has led the Supreme Court to shut down all such allocations. Multinational companies are losing faith in India. They believe that their money and assets are not safe here. In some cases, their own Indian executives swindle money and cook the books. Foreign investors found that many promoters that they regarded as daring entrepreneurs were actually crony capitalists paying off government officials to gain unfair advantage. In fact, corruption has led many good Indian companies to decide to invest abroad. With elections looming and growth slowing, the UPA decided to embark on several massive entitlement programmes.
With mining shut down and coal being imported, the current account deficit has shot through the roof and put pressure on the rupee. Inflation is surging and people are buying gold, since they do not trust the financial system to protect their assets. These policies will make India vulnerable to external shocks that could easily trigger another balanceof-payments crisis. But the government does not care. Once the US Fed announced that it was considering tapering its quantitative easing, the crisis was bound to hit India.
1990, 1998, 2013
What we are facing now is reminiscent of 1990 and 1998. A weak government is plunging India into crisis. Foreign investors have lost faith in India and will demand harsh conditions to send dollars to us.
The Indian public is going to be penalised for the government's mistakes. The UPA cannot whitewash this by blaming external factors. The crisis needs tough decisions: inflation will have to be controlled, spending may have to be curtailed, tax policies modified and investors assured.
A leaderless government cannot undertake such actions. The only honourable course of action for the government is to accept responsibility and ask for a fresh mandate.
We too have a Dream
The NDA's economic policies are clear. We want to build India's productive capacity and unleash its entrepreneurial energies. We want industries to grow. Foreign investors can trust us to create an investment-friendly environment and work in the national interest. We shall pay the fullest attention to rural areas and ensure that the quality of life there match that of cities.
We want to create the world's best safety net through a citizen-based registry that benefits the vulnerable and the needy. So, let us go to the people and let them judge; that is the only way out of the present crisis.
The writer is former finance minister and BJP MP
What we are facing now is reminiscent of 1990 and 1998. A weak government is plunging India into crisis. Foreign investors have lost faith in India and will demand harsh conditions to send dollars to us.
The Indian public is going to be penalised for the government's mistakes. The UPA cannot whitewash this by blaming external factors. The crisis needs tough decisions: inflation will have to be controlled, spending may have to be curtailed, tax policies modified and investors assured.
A leaderless government cannot undertake such actions. The only honourable course of action for the government is to accept responsibility and ask for a fresh mandate.
We too have a Dream
The NDA's economic policies are clear. We want to build India's productive capacity and unleash its entrepreneurial energies. We want industries to grow. Foreign investors can trust us to create an investment-friendly environment and work in the national interest. We shall pay the fullest attention to rural areas and ensure that the quality of life there match that of cities.
We want to create the world's best safety net through a citizen-based registry that benefits the vulnerable and the needy. So, let us go to the people and let them judge; that is the only way out of the present crisis.
The writer is former finance minister and BJP MP
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