Huge debt redemption pressure could leave rupee a lot weaker

Economists See Re Breaching 50-Mark As Redemptions Worth $89 Billion Loom

 WITH the $89-billion worth redemptions of short-term debt between July 2008 and July 2009, the rupee could come under further pressure. Most economists have forecast that rupee is set to breach the Rs 50-mark soon.
    According to the latest data on the external debt released by the central bank, as on June 30, the redemption of debt maturing in less than a year touched $89 billion. This is equivalent to about 40% of the country's total debt of $221 billion as on that day. But next year, the figure is expected to be much lower at $16.5 billion. With more addition to the debt in the form of NRI deposit commercial borrowings and other short-term debt, the figure could be higher for next year. But with a slowdown in the debt pile-up in the recent past, the redemption pressure may not be as high.
    Nevertheless, the redemption pressure will not only substantially deplete the stock of reserves, but also put a pressure on the rupee. "The balance of flows to and from India is clearly biased against the rupee and we see the distinct possibility of it breaching the Rs 50-mark in the next couple of months, if not days," says an HDFC Bank report released on Wednesday. By December, it could be in the range of Rs 52-53, the report has added.
    YES Bank chief economist Shubhada Rao said, "Near-term pressures on the rupee remain unabated due to a lack of dollar supply in the market (only RBI is supplying), because of a demand from oil companies and other importers. But most importantly, the continuing strength of dollar versus major currencies. These factors could lead us to believe that the rupee could reach a level of 52.'' While Barclays and UBS have forecast the rupee to touch Rs 53 and Rs 50, respectively.
    The report further goes on to add that deleveraging by global financial institutions is likely to continue. Frozen global credit markets have resulted in an acute dollar shortage. Therefore, most financial institutions are using emerging markets as a spigot of dollar liquidity to meet their capital and liquidity requirements.
    In addition, further pressure on outflows because general elections are expected to take place in early 2009, the weak current account and deteriorating government finance could add further pressure on the rupee. The market expects the central bank to further adopt an accommodative stance.
    "A more aggressive stance by the RBI in its policy review on Friday, like reduction in SLR and further reduction in CRR along with another repo rate cut and refinance to banks across sectors could help rein in the value of the rupee, according to J Moses Harding, head – global markets group, IndusInd Bank.
    DOWN THE LANE
Cut in SLR & CRR, and another repo cut could help rein in Re's weakness This is equivalent to about 40% of the country's total debt of $221 billion The redemption pressure will not only deplete the stock of reserves, but also put pressure on the rupee Deleveraging by global financial institutions is likely to continue Frozen global credit markets have resulted in an acute dollar shortage