When promising tech company Subex sold $180 million in five-year convertible bonds in March 2007 to fund the acquisition of a Canadian technology company, India was at the height of an unprecedented market boom.The economy was growing at more than 9 per cent a year, the rupee was rallying towards a record high against the dollar and the BSE Sensex had surged six-fold in the previous five years, even trumping the performance of China's much vaunted Shanghai stocks.Today, India and Subex face a different reality altogether. The stock market has dropped by a fifth from the end of 2007 and the rupee in recent weeks has hit successive record lows - a costly combination for Indian companies which together face foreign currency convertible bond redemptions this year of nearly $5.5 billion."There will be some casualties," said Jacques Berghmans, a Brussels-based India convertibles manager with TreeTop Asset Management, which looks after about 1 billion euros in assets. "Some of the companies are already over-leveraged and they will find it tough raising fresh funding in this market," he said.Investor fear about the fate of the euro zone is the latest factor to have hit confidence in India, undermining the currency.But investors have raised a number of India-specific red flags to explain why the rupee is the biggest losing currency this year in Asia among those monitored daily by Reuters, including a swelling current account, heavy government spending particularly on subsidies such as oil, a rash of unpredictable regulations and tax and a coalition that is struggling to push through any reforms to bolster an economy now growing at just above 6 per cent.The slide in the stock market meant the conversion prices for many of the convertible bonds was much higher than the market price of the issuer.The dollars to pay off investors are also much more expensive. The rupee has dropped some 30 per cent from its record high to its record low.Fitch Ratings predicted in a report in February that about half of the 55 companies with maturing foreign currency convertible bonds (FCCBs) in 2012 were at risk of some type of restructuring or default.In addition, with the government stuck in policy paralysis ahead of national general elections that must be held by 2014, overseas lenders could become more wary in general of Indian companies, which raised $30 billion in external commercial borrowings in 2011.THE SUBEX EXPERIENCEThe combination of economic factors dragging on India, in particular a fiscal deficit estimated at almost 6 per cent of GDP for the year to March 2012, has already prompted Standard & Poor's ratings agency to downgrade the outlook for India's credit rating, which stands just one notch above junk status.A cut in the rating would raise borrowing costs across the board, adding to the premium lenders would demand from companies such as Subex in return for their capital.It would also raise further doubts about India's position in the so-called BRICS of Brazil, Russia, India, China and South Africa, a grouping that represents the emerging markets challenging the world order so long dominated by North America and Europe. As India's credit rating is under pressure for a downgrade, rival Indonesia is on the up. Many see it as the new 'I' in BRICS.Subex is a typical example of the problems many Indian companies face, said analysts, bondholders and executives of companies with overseas holdings.Started as a provider of software products and services to global telecom companies, it faced a promising future in 2007. More recently, it has suffered from cutthroat competition and sluggish spending on technology in the wake of the global financial crisis.After selling $180 million in five-year convertible bonds in 2007 it sold close to $100 million in three-year convertible notes in 2009, a year when the stock market rose a stunning 81 per cent. Conversion, which seemed a reasonable prospect when the bonds were sold, is out of the question.After some changes, the conversion price for the 2007 tranche was set at 136.04 rupees and for the 2009 tranche at 80 rupees. Subex stock closed on Friday at 24.60 rupees."FCCBs are usually a product of bull markets. People expected prices would go further up, and they set very high conversion prices," said Deep Mukherjee, a Fitch Ratings analyst in Mumbai.In its February study, Fitch said Subex and six other companies were likely to restructure their convertible bonds with "significant distressed debt exchange" features.Subex faces a deadline of July 9 to pay its debt, although it has reduced the outstanding amount to $94 million after redeeming some of the debt. T he company is trying to convince investors to accept new 5-year notes in exchange for the existing ones. Subex did not respond to requests for comment.Wind turbine maker Suzlon Ltd, with net debt of $2 billion that is three times its market value, is negotiating with bondholders to seek up to 45 more days to repay $360 million in FCCBs maturing in June, the company said this month.The conversion price of 97.26 rupees a share is way above its stock price, which last traded at 20.45 rupees. Part of Suzlon's strategy is to raise up to $300 million in loans to pay the bondholders next month.'SHEDDING TEARS'Bigger and healthier firms such as Tata Motors and JSW Steel either have a combination of enough cash and assets on their balance sheets or access to domestic funding from bankers to avoid major problems.Tata Steel has $473 million in FCCBs falling due this year, and JSW Steel $274 million.For many executives the turn of fortune for India in the past few years has been a hard lesson. Smaller and medium-sized Indian firms now face a much tougher lending landscape."When we issued it, free money was available and I think no one expected that one will have to repay that amount," said Hiranya Ashar, chief financial officer of mid-sized IT services provider Rolta India."Everyone's expectation was growth is happening at 20 to 25 per cent and if growth is happening then stock prices will also go up and eventually these FCCBs will get converted."Rolta, which this month posted a drop in profit for the third quarter in a row, has raised $135 million from a clutch of Indian banks to redeem bonds maturing next month. It has to repay as the conversion price is five times the current market price."It was not easy to get the refinance done. All the lenders are very selectively giving refinance facilities ... our leverage levels are not very high as compared to maybe some other companies who are stretched," Ashar said.Analysts say top quality Indian companies will still be able to raise funds from international investors. But smaller and medium sized companies that in previous years banked on a non-stop rising share prices, now face being shut out of markets, especially since many lenders are under pressure from regulators to boost capital ratios and lower their risks."Now, I don't want to touch 90 per cent of Indian convertible bonds. It is very dangerous," said Berghmans, who holds bonds of Educomp Solutions and Rolta India among others.However, bond investors can't cry foul, analysts say. Many were swept up into buying into India's seemingly unlimited potential without conducting the necessary financial due diligence."The risk is hitting them at a bad time, but should anybody shed any tears for these investors?" Fitch's Mukherjee said.(Reuters)
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Moody's Investors Service says the depreciating rupee will only have a "limited" impact on India's sovereign ratings, as only 7 per cent of total government debt is placed overseas, comprising 5 pct of gross domestic product.The bigger pain would come in the private sector, Moody's said in a weekly credit report out on Monday, given that a falling rupee will raise the cost of paying back foreign currency borrowings.Still, the agency said total private sector external debt is at a "relatively low" 16 per cent of GDP, meaning the impact on the sovereign ratings from this private sector exposure would also be limited."Individual firms' foreign debt repayment troubles are unlikely to lead to the sort of domestic demand collapse or deleveraging seen in countries with more significant private-sector external leverage," it said.The rupee has been hitting record lows against the dollar because of concerns about the country's widening current account gap as well as the fiscal deficit. It has recovered somewhat since its latest record low of 56.40 hit on Thursday.Most of the government's debt is owed to multilateral or bilateral creditors and has a maturity profile that keeps annual repayments relatively low, according to Moody's.In terms of the private sector, the rupee fall is credit negative for firms without export revenues and with foreign debt obligations, Moody's noted, though it adds these borrowings must be viewed in the context of India's nearly $300 billion in foreign exchange reserves.According to Thomson Reuters publication IFR, Indian companies have about $96.6 billion in external debt, of which only 40-60 per cent is estimated to have been hedged.(Reuters)
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Inflation accelerated in May, adding to an avalanche of harsh data for the beleaguered leaders and making it harder for the RBI to revitalise the flagging economy with a widely expected RBI interest rate cut next week.The 7.55 per cent rise in the wholesale price index (WPI) over a year earlier came as both food and fuel price pressures intensified. The outcome matched expectations in a Reuters poll, but an upward revision to the March number to a 2012 high of 7.69 percent raised worries of greater pressure to come."The most important negative is the massive revision to the March number, which means the May headline inflation may be revised upwards" said Rajeev Malik, an economist with Singapore-based brokerage CLSA."I don't think this data, especially the revision, gives much breathing space to the Reserve Bank of India."Most analysts expect the Reserve Bank of India to cut its repo rate to 7.75 per cent from 8 per cent when it meets on Monday, following a 50 basis point cut in April.A slump in economic growth in the first quarter to a nine year low of 5.3 percent will trump immediate concerns about inflation, they said. A drop in core inflation, which excludes food and fuel, eases concerns about cutting rates, they said.The RBI might also cut required levels of bank reserves as well."Growth is in stagnation, especially manufacturing. The loss of momentum is very, very perceptible," said Shubhada Rao, chief economist at Yes Bank in Mumbai.But a 3 basis-point rise in the benchmark 10-year bond yield to 8.32 percent signalled some expectations that more aggressive policy easing was unlikely.The one-year OIS rate rose 4 basis points to 7.53 per cent. Bank shares pulled back from an earlier rally to push down Sensex 0.9 percent.India's inflation is higher than major industrialised economies and its peers in the so-called BRIC grouping, which includes Brazil, Russia, and China.It is one reason Prime Minister Manmohan Singh has balked at cutting diesel subsidies blamed for the government's wide fiscal deficit. New Delhi is under increasing pressure to reform after the January-March slide in growth.Finance Minister Pranab Mukherjee said he was "confident" headline inflation would remain between 6.5-7.5 percent throughout the fiscal year 2012/13, possibly suggesting he is comfortable with that range.India cautiously raised petrol prices last month but has not tackled more politically sensitive and subsidised fuels, such as diesel. Speaking on the sidelines of an OPEC meeting in Vienna, India's oil minister blamed high global oil prices for weak growth in India, which is a net importer of crude.Adding to India's economic gloom, provisional trade data on Thursday showed exports slumped more than 4 percent in May from a year earlier, the second fall in three months. The trade deficit widened to $16.3 billion."We are passing through difficult times," senior trade ministry official Anup Pujari told reporters.The founder of one of India's leading IT firms this week berated the government as "without a leader," Standard & Poor's warned the country could be downgraded to junk status because of political inaction, and data on Tuesday showed India's industrial output growth flatlined in April.Eased ConcernsThe WPI showed inflation quickened from 7.23 per cent in April, keeping it near the highest levels this year.Core inflation dropped to 4.85 per cent, down by about a percentage point from February. Economists calculate core inflation from the data."Since core inflation is still below 5 percent, I would expect RBI to cut rates by 25 basis points as that is the key number," said A. Prasanna, an economist at ICICI Securities Primary Dealership in Mumbai.India's repo rate of 8.00 percent is the highest central bank policy rate among major economies in Asia.One reason behind the slowdown in India's economy was a series of 13 rate rises between March 2010 and October 2011 to quell inflation, which nevertheless remains relatively high.Supply bottlenecks that stoke price pressures remain largely unattended by the government. A fall in the Indian rupee by 13 percent against the U.S. dollar since early February has raised import price pressures.The economic slowdown has been deepened by the euro zone debt crisis, a policy logjam in New Delhi and its preoccupation with selecting a president from the political ranks next month for the mostly-ceremonial role.Capital inflows have slowed and the current account and fiscal deficits widened, raising fears in some quarters that India could face a repeat of a 1991 balance of payments crisis.This week's industrial output data suggested little pick up in activity from the first quarter, triggering fresh calls for the government to restart an economic liberalisation programme stalled since 2004.US companies have grown increasingly concerned, "fearing that the investment environment has deteriorated," White House international affairs adviser Michael Froman said on Tuesday, a day before high-level talks aimed at cementing US-India ties."There is no room left for any fiscal stimulus, so to trigger growth, the RBI has to lower policy rates," said Rupa Rege Nitsure, chief economist at Bank of Baroda in Mumbai.(Reuters)
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There's a single message for those looking at the rupee's value: maybe further intervention by the Reserve Bank of India (RBI) is a bad idea. First off, we do not have the kind of reserves needed to protect the rupee's value. On a fundamental and structural basis, the rupee's value is quite representative of its current value against the dollar.Granted, the ‘fundamental' value is also being driven by events outside the government's or RBI's control (our economic fundamentals — the current account and fiscal deficits, and high, persistent inflation — are factored in). So is there anything else the government can do?Apart from gold imports — which are essentially unproductive assets — the trade balance is more or less stable, if high. There's higher customs duty on gold; and while that may dampen consumption, raiding it further will only increase illegal channels. Perhaps a quantitative cap might work better.Structural policy changes that boost exports — changes in certain sectoral policies and rules for special economic zones — might also help. But such changes will take time and will not bridge the savings-investment gap (that is currently being filled by foreign inflows like FCCBs and ECBs) quickly. Firms, government and ordinary folk have grown obese by ‘gorging' on foreign money (just look at the stock market, for instance). Perhaps it's now time to go on a crash diet (pun not intended). For a start, policymakers in government and the central bank must clearly state that intervention will stop, and the markets will decide the value of the rupee.Some RBI officials have begun to send out that message. It is time the finance ministry followed suit. The only way is to get fiscally fit.(This story was published in Businessworld Issue Dated 28-05-2012)
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The RBI will need to deliver more rate cuts to ensure the same level of policy transmission to lower the cost of funding and support growth," Nomura says in a report.If RBI wants to support growth, "then a 100bp reduction in lending rates, for instance, would require more than a 100bp cut in the repo rate," Nomura says.Nomura says the RBI has wanted the repo rate to "remain the operative rate," and has thus brought banking system liquidity into deficit to increase the effectiveness of India's main lending rate.Now that RBI is in easing mode, the tight liquidity conditions would mean longer lags in the policy transmission.Liquidity management has thus become a "top priority," so Nomura expects RBI to undertake more open market operations and cash reserve ratio cuts, or opt for a cut in the statutory liquidity ratio, to ensure "effective" policy transmission.Indian petroleum minister said in Vienna on Wednesday that a sustained $10 per barrel increase in crude prices reduces growth in developing countries by 1.5 per cent. Crude producers of OPEC are meeting in Vienna this week."There could not be a more direct cause and effect relation than high oil prices retarding economic growth of oil-importing countries," Reddy said in a speech, a copy of which was issued to reporters by his ministry in New Delhi.India is the world's fourth-largest oil importer and its biggest suppliers are all OPEC nations -- Saudi Arabia, Iraq and Iran.The country's oil import bill rose to $140 billion in 2011-12 from $100 billion in the previous fiscal year as its average cost of imported crude rose $27 per barrel, Reddy said.On Tuesday, India reported its industrial output growth flatlined in April, piling pressure on policy makers to cut rates for the BRIC nation that Standard & Poor's warned could be downgraded to junk status because of political inaction.Standard & Poor's said on Monday that India could become the first of the so-called BRIC economies to lose its investment-grade status. This comes less than two months after the agency cut its rating outlook for the country.Since India's long-term sovereign rating is already ‘BBB-', just one notch above speculative (junk) grade, a downgrade will mean junk status for India's sovereign ratings. "Slowing GDP growth and political roadblocks to economic policymaking are just some of the factors pushing up the risk that India could lose its investment-grade rating," the ratings agency said in its report --`Will India Be The First BRIC Fallen Angel?'India's sovereign rating is BBB-, the lowest investment grade rating, and in April S&P lowered its outlook on the rating for Asia's third-largest economy to negative from stable.Goldman Stays Underweight On Indian SecuritiesMeanwhile, Goldman Sachs on Wednesday recommended staying "underweight" in Indian equities on a three-month horizon as equities may slide further on the back of "a sluggish domestic and global growth outlook."However, it added that "the trough in NIFTY is behind us".Goldman also recommended staying "market weight" on 12-month horizon, says one-year target for the Nifty at 5,600 is underpinned by 12.7 times multiple on fiscal 2014 EPS of 438 rupees/share."Equities may start to price a recovery in FY14 as well as a better external backdrop," Goldman says.Goldman favors Indian defensive and domestic demand-driven sectors and says to "underweight" global growth and investment-cycle sectors such as banks and commodities.NSE index, or Nifty, last flat at 5,117.65 points.
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In a move that would bring relief to bank customers, the government has asked the Reserve Bank to work out a framework under which funds could be transferred electronically free of charge from one account to the other.These suggestions were made by Finance Minister Pranab Mukherjee in his address at a meeting with chief executives of the public sector banks, which among others, was also attended by RBI Deputy Governor K C Chakrabarty.At present, banks charge between Rs 5 to Rs 55 for electronic transfer of funds from account of one bank to another through National Electronic Fund Transfer (NEFT) and Real Time Gross Settlement (RTGS)."I would also urge upon Reserve Bank of India (RBI) to proactively work on this front and to see that all electronic banking transactions should be possible without any charges being levied," Mukherjee had said yesterday.Cost free electronic transaction would encourage customers to use this medium for inter-bank as well as intra-bank fund transfer across the country.The move would also help reduce cash movement and cash transaction, a senior official of a public sector bank said.For outward transactions under RTGS mechanism, banks charge Rs 30 for electronic transfer of Rs 2 lakh to Rs 5 lakh and Rs 55 for amounts above Rs 5 lakh.On the other hand, under NEFT the charges range between Rs 5 and Rs 25.Citing example of Oriental Bank of Commerce, which has waived all charges for electronic transactions up to Rs 1 lakh, Mukherjee had said, "I am confident that all the public sector banks would follow this excellent initiative." The Department of Financial Services is working on the implementation of an action plan to bring the country's banking payment structure at par with global standards."Public sector banks must promote electronic mode of transactions over other modes. They should examine the possibility of making NEFT transactions upto Rs 1 lakh free of charges, as has been done by Oriental Bank of Commerce," Mukherjee had said.He also told the bank chiefs to that the use of debit cards to the point of sale without any transaction charges at least for micro and small transactions should be their next objective.Farmers should be able to buy their agricultural inputs by using their KCC-cum-debit cards at point of sale machines, without the use of cash, he said.Also, all fair price shops should be similarly covered."I would request all stakeholders to work in this direction so that use of cash could become less important," he added.(PTI)
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Brazil raised the stakes ahead of next week's Group of 20 summit on Tuesday by saying it may cap its contribution to a planned funding increase for the International Monetary Fund unless there are firm promises to give emerging markets more say at the international table.While summit host Mexico urged Europe to quickly finalize details of aid for Spain's banks, Brazil said it might contribute less than it had planned to the extra $430 billion promised to the IMF by member states in April to help fund heavily indebted euro zone countries.The euro zone sovereign debt crisis is set to dominate the June 18-19 G20 leaders' meeting in Los Cabos as it did the last summit in Cannes, France, six months ago. The meeting starts a day after Greek elections which could decide whether the country stays in the euro zone.The G20, created in 1999 after the Asian financial crisis as a way to forge stronger links between developed and emerging economies, was promoted to be the No. 1 global policymaking body after the 2008 financial crisis but its authority has been undermined since as countries pursued their own domestic agendas.Brazil made it clear it would use the meeting to insist on more say at the IMF. Voting power at the IMF is currently dominated by the United States and other developed powers."We are frustrated because we see that countries that know they will lose influence are resisting the (quota) formula," said a senior Brazilian government official, who declined to be named to speak more freely. "The amount of additional resources remains open. It could be more than $10 billion or less."The European Union has said it would reduce the number of seats it holds on the IMF board by two in the autumn this year, but G20 sources who spoke to Reuters on condition of anonymity were pessimistic about a firm agreement by then.China, India, Russia and Mexico are among countries yet to say how much they will commit to lend the IMF, although final pledges are due at the Los Cabos summit.A European source said countries were waiting to see how much China would contribute and on what conditions. China is said to be considering a $60 billion pledge.The so-called BRICS nations of Brazil, China, India, Russia and South Africa are due to meet privately on June 18, the Brazilian official said.The IMF reform package be finalized through until the U.S. Congress approves the move, something that is highly unlikely ahead of November elections because it would require the authorization of additional funding for the IMF.GROWTH ACTION PLANAlthough markets are skeptical about a deal by euro zone finance ministers last Saturday to lend Spain up to 100 billion euros to recapitalize its banks, Mexican President Felipe Calderon said the move could mark an important step towards resolving the region's debt crisis."The decisions which were announced at the weekend ... really do open the door to finding a solution to the case of Spain and at the same time making an enormous step towards resolving Europe's economic problems," he told reporters at a news conference in Mexico City. "I would argue for these proposals to be firmed up quickly."Calderon said the leaders aimed to come up with a Cannes-style action plan to support global growth, but did not elaborate on potential measures."(The action plan) will not only include measures to confront and resolve the European crisis, which is ultimately an economic crisis, but will also put forward concrete measures on public policy in key areas in the realms of tax, finance and monetary policy, which will help to boost global growth in the long term," he said.A European source said the plan might include commitments to roll back austerity budgets in certain countries, but it was too early for Europe to give specifics on its economic growth pact because of an EU summit on June 28-29.There is a growing push in the euro zone, led by newly elected French President Francois Hollande, to do more to stimulate economic growth and not just focus on reducing fiscal deficits.Hollande may well go into the G20 meeting with increased authority to push a growth agenda as his Socialist party is expected to win a parliamentary majority at a run-off vote on June 17.Austerity advocates Germany, meanwhile, were keen to put some of the focus on other potential problem areas such as the planned combination of tax rises and spending cuts due to hit the United States later this year, dubbed the "fiscal cliff"."The euro zone will surely be a topic, but as Europeans we also want to talk about other themes related to the global economy that go beyond the euro zone, for example budget consolidation in the United States, currency flexibility in China and structural reforms in emerging markets," a German the officials told reporters."We think when talking about global growth it is important to look beyond the euro zone, not to limit the discussion to Europe."German officials also made clear they wanted to separate a discussion over resources for the IMF and a debate on reforming voting powers in the global lender, putting Germany at odds with Brazil.(Reuters)
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Will oil companies' monthly dollar purchases be put through off market? If dealers in the foreign exchange market are to be believed, the central bank will do a great favour if it indeed does so. Simply put, an off-market deal is one wherein the Reserve Bank of India (RBI) pays oil companies the dollars they need for their crude imports. It will help ease the pressure on the rupee which fell during the week to a life low of Rs 54.48 against the greenback on Friday.The idea is not new; the central bank does it often, but it does not go public with it. Forex dealers say that it would make sense if no song and dance is made about it – if made public, it would be a confirmation the rupee is under pressure, and dollar inflows will be scarce in the days ahead. And, if at a later date, the RBI were to withdraw the measure, it may give the impression that all is well. "All of us expect the authorities to go ahead and do it. It will be a big relief to the market," says Harihar Krishnamoorthy, country-treasurer at First Rand.The last time the RBI made an official announcement about such a move was in 2008 after the Lehman Brothers' financial meltdown. At that point, the central bank gave dollars to oil companies in exchange for the oil bonds issued by the Government of India. Sources say this time around, oil companies will pay the RBI the dollar equivalent in rupees. In an off-market transaction of this sort, the dollar is sold by the central bank at its reference rate – the quote for the greenback at noon.Forex dealers say that since the dollar inflow will be poor for some time to come given the fresh round of gloom due to Greece, it is high time the central bank came up with a mechanism to fire wall the rupee. "Taking oil payments off-market is sensible, but you cannot escape from the fact that the current weakness in the rupee will hold unless you get dollars to come in," says Ajai Sahai, director-general at the Federation of Indian Export Organisation. Concerns over the global economy slowdown has made investors jittery, more so after the downgrade of 16 Spainish and 26 Italian banks by Moodys'.A fortnight back, a fire wall was thrown. The central bank made it mandatory for exporters to convert 50 per cent of the $5 billion in the exchange earners' foreign currency (EEFC) account into rupees. It helped the authorities to increase the supply of dollars in the spot market and gave relief to the rupee. This was seen as a far better option than dollar sales by the RBI, which would have impacted rupee liquidity – every time a dollar is sold by the central bank, an equivalent amount is sucked out in rupees.Of late, dollar sales by the RBI has affected rupee liquidity. It has forced it to add liquidity to open-market operations – banks avail of liquidity by pledging Government of India securities (G-Secs). The central bank has bought G-Secs worth about Rs 25,000 crore since April 2012 to infuse liquidity into the system. The bond yields are expected to stay at current levels of 8.50-8.55 per cent on the 10-year benchmark G-Sec on the back of continuous weekly bond supply, tight liquidity conditions and no rate expectations for June. The government is to auction G-Secs worth Rs 15,000 crore on a weekly basis while the liquidity condition is negative with banks borrowing more than Rs 100,000 crore from the RBI daily. The liquidity is also expected to tighten in June due to first quarter advance tax payments.
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