Improved macros to shield Rupee from Greek turmoil

MUMBAI: However much a city administration is prepared to face the cyclone, it is difficult to prevent trees getting uprooted, short-duration power shutdowns and collapse of walls in neglected buildings. But it can avert a calamity.

The storm emanating from Greece in the Mediterranean could cause destruction in Indian financial markets, but the damage may be limited, thanks to better macro-economic fundamentals than in 2013 when the currency was roiled.

At the heart of financial markets lies the currency. The behaviour of the Indian rupee, among the best performers in emerging markets, reflects investors’ faith in the currency.

“What is usually vulnerable is debt, not equity,” says Ananth Narayan, managing director, regional head of global markets, Standard Chartered Bank. “There won’t be a major outflow given that no one gets 8% return in a stable currency.” Given that many investment advisors, such as Chris Wood of CLSA, are overweight on India, equities even if they are sold, funds may not flow out of India, but could be reinvested later.


The rupee fell 0.3% to Rs 63.85 on Monday, and for the year it is down 1.2%, compared with S Korean Won which fell 0.7%, and 3% for the year. The S African Rand has declined 5.8% in 2015. The Greek crisis is the first test for both RBI governor Raghuram Rajan and Prime Minister Narendra Modi’s economic policies. The volatility will reflect the amount of ring fencing they have done.

What has this administration delivered in terms of the macro economy? Inflation which was running at double-digits is down to about 5%. Current account deficit which was at 4.9% of GDP in June 2013 quarter is down to 0.2% of GDP in the latest March quarter.

Foreign exchange reserves are at a record high of $355 billion, compared with a cover for less than seven months of imports.

Does this mean that the rupee will not fall? Not necessarily. The rupee — which is overvalued by nearly 10% based on the real effective exchange rate — needs to fall for the country to remain competitive. So, the regulator may not be averse to seeing it slide by about 5% to 7% without much volatility.

But the slide may be more due to companies rushing to hedge their positions in fear rather than foreign investors fleeing the country.

"Our sense is that the unhedged exposures are significantly higher than they ought to be and people are getting little too comfortable with the stability of the rupee," Rajan has said. "The extent of hedging by our measures has come down. And we have to be worried about that."

What would international investors do? Debt investors who are up to limits in government bonds might hold on given that 8% yield is unlikely in any country with a stable outlook. Equity investors have hardly taken money out of the country though there have been bouts of selling.

In fact, the Greek crisis could even turn out to be in favour of emerging markets like India if the ECB comes up with more quantitative easing measures, and the US Fed pushes back its decision to normalise interest rates.