MUMBAI: Beaten down by the global economic crisis, the export oriented tiger economies of Asia have stopped roaring. From Japan, to South Korea, Taiwan, China, India and beyond, the global economic crisis wreaked havoc.

The huge outflow of money from foreign investors and the high budgetary deficit run by the governments to revive the economy have put pressure on their respective domestic currencies.

After touching a new lifetime low of 52.18 intraday on Tuesday, the Indian currency marginally recovered to close at 51.97 against the dollar. Experts are of the view that India’s domestic currency relevant fundamentals are deteriorating.

“India has no material external debt overhang, unlike other Asian or European countries and foreign currency reserves seem adequate to cope with any threats to India’s external solvency. However, we have a negative view on the dollar-INR front on the uncertain outcome of the general elections in April and concern over sustainability of India’s public finances are putting pressure on domestic currency. Also the outflow from foreign players from stock markets is putting enormous pressure on the domestic currency,” Before 2008, net FDI inflow into India was slow to move, but it increased significantly last year. It may simply be that the sluggish and incomplete nature of FDI liberalisation held FDI back until global investor sentiment turned bullish. This rationale would put FDI to India mostly in the mercy of global forces. On this basis, the prediction is not satisfying. The calibration of Asian FDI and global GDP growth suggests that regional FDI could fall to around zero this year.

“The external sector was buttressed last year by record inflows of FDI, remittances, and software exports. All are likely to decline sharply this year. Earlier this year, we adopted a year-end forecast of 54 for USD-INR. The risk now is that the rupee will overshoot rather than undershoot our forecast,” said HSBC in a report.

India is the largest recipient of workers remittances in the world according to the World Bank. Total private transfers have more than doubled in the past four years, rising from USD19.5bn in 2004 to USD52.2bn (annualised) in the year to September 2008.

“The increased number of Indian overseas workers reflects the two key influences of the Middle East oil boom and the West’s demand for highly skilled IT workers. However, given the slump in the global economy with oil falling by nearly 72 per cent, the remittances will dry up and will put more downside risk for rupee in the near term,” said a dealer with large private bank. Since 2001, India’s software export sector has recorded an annual average growth rate of 30 per cent. Software and services exports (includes exports of IT services, BPO, Engineering Services, R&D and software products) reached $40.1billion in the year to September 2008, posting growth of 27.5% y-o-y.

91% of total exports go to the Euro-area, UK and US. However, this does not mean the sector is immune from cyclical forces either. The steep fall in software exports and a sharp deterioration of the developed economies indicates an unprecedented decline in software exports in the offing.

Industry discussion also thrives with talk of fresh bulk deals drying up, the duration of deals shortening, and demands for price discounts gathering steam.

In late February, S&P maintained its BBB rating on India but revised the outlook to negative. The revision was on the basis of a view that India’s fiscal position has deteriorated to a level that is unsustainable in the medium term.

“We expect general government deficit, including off-budget measures such as oil and fertilizer bonds, to increase to 11.4% in the fiscal year ending 31 March 2009, from 5.7% in the previous fiscal year,” the HSBC report added further.

Raxson Forex does not expect the forex policy to aim to do any more than smooth the depreciation in the currency. “From a valuation perspective, there is certainly little reason for the authorities to be concerned over a deliberate weakening of the rupee,” said Anuj Singhal, currency analyst at Raxson Forex.

source: Economictimes

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