Global Banks Can Ride India’s Dollar Crunch In Style -- 2013 Style
(Bloomberg Opinion) -- Bangladesh is seeking a bailout from the International Monetary Fund; Pakistan is expected to receive its own $1.2 billion rescue deal soon. Neither wants to end up another Sri Lanka. The island nation was pulled into a vortex of empty dollar coffers, popular anger over shortages of food, fuel and medicines, political chaos and a still-deepening economic funk.
Among South Asia’s major economies, only India remains standing. But the region’s largest economy is also wobbling a bit.
Even after depleting 11% of its foreign-currency arsenal, the Reserve Bank of India has only managed to keep the rupee near an all-time-low of about 80 to the dollar. Should New Delhi start filling up an IMF loan application? Not so fast.
For one thing, a strong dollar isn’t a big problem for balance sheets. Yes, Indian firms are adding to the pressure on the rupee by scrambling to buy protection for their $79 billion in unhedged overseas debt. But about half of it — or $40 billion — is the liability of state-run borrowers. Their exchange-rate risk, as RBI Governor Shaktikanta Das has argued, can be absorbed by the government, although such a contingency is unlikely to arise. As for the reserves falling to $573 billion from $642 billion in October, “You buy an umbrella to use when it rains,” he said.
Governor Das omitted to mention that he also has a mackintosh handy against the heavy downpour caused by relentless tightening of US interest rates. That would be the 18 million-strong Indian diaspora, the world’s single-largest community of people living outside their country of birth. Give them a juicy yield and they’ll park hard-currency time deposits with Indian banks, something they have done unfailingly in the past to get their motherland out of tight spots.
Better still, the wealthy non-resident Indians, or NRIs, will soon have their private bankers pestering them to take out low-cost loans and invest in India without any currency risk. In 2012, I saw a term sheet from a global bank offering to lend S$900,000 ($650,000) against S$100,000 of client’s own funds. The full S$1 million would get placed with an Indian bank as a foreign-currency nonresident deposit. The annual return for the customer, after paying the borrowing costs, was a guaranteed 10%, at a time when a Singapore dollar deposit was paying 0.075%.
Then came the mid-2013 taper scare, and an acute dollar shortage for India, Indonesia, Brazil, Turkey and South Africa — the “Fragile Five” economies, as Morgan Stanley termed them. Back then, the RBI blessed this kind of leveraged dollar-raising from the diaspora by giving Indian banks a sweet deal on swapping their foreign-currency funds into rupees. In effect, India manufactured its own private bailout with one difference: The creditors — the NRIs fronting for global banks — could only ask for their money back; they couldn’t demand the government spend less or open up the economy to more competition, or impose any of those conditions that make sovereign nations resent the IMF.
Looking at the clouds gathering on the horizon, it might not be too early for Das to start thinking of a similar Plan B.
To some extent, the effort has already begun. After tugging at the patriotic heartstrings of NRI customers by telling them how their remittances help create jobs and improve healthcare and educational facilities back home, the State Bank of India, the country’s largest lender, is informing them of the 2.85% it’s offering on dollar deposits of one to two years. This is already generous: Hong Kong banks aren’t paying much more than 0.3% for 12-month U.S. currency funds. The next step, following the 2013 playbook, would be for foreign banks to start funding the NRIs so that instead of depositing, say, only $100,000, they can put up $1 million and earn double-digit leveraged returns.
Finally, the RBI could step in and offer to swap the dollar funds into rupees cheaply for the borrowing Indian banks, which is what made the program a resounding success the last time.
India raised $26 billion via this route in 2013, only a fraction of which was true NRI money, says Observatory Group analyst Ananth Narayan, a former Standard Chartered Plc banker. “The rest was overseas bank money lent to NRIs, flowing in as NRI deposits.” From the country’s standpoint, this was expensive. As Narayan notes in an article for the website Moneycontrol, India effectively scooped up three-year dollars at about 5%, or a spread of 4.35% over US Treasury yields at the time. “This was a high (if hidden) price to pay. A sovereign bond at this yield would have been a public relations disaster.” Should the need arise again, it may be better to extend the cheap swap option beyond NRI funds to all dollars raised overseas for a reasonably long period, Narayan says. That will help lower the subsidy cost.
The bottom line, however, is that India isn’t in the same boat as its South Asian neighbors, even though it’s in the same choppy waters. Bloomberg Economics has raised its forecast for the upper end of the Federal Reserve’s policy rate to a higher-than-consensus 5% by mid-2023. Such a hawkish response to US inflation could easily knock off a couple of more spokes from the RBI’s foreign-reserves umbrella as it tries to prevent the rupee from weakening too fast too soon. But Governor Das knows that the diaspora raincoat is dry — just in case India needs it.
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Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services in Asia. Previously, he worked for Reuters, the Straits Times and Bloomberg News.
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