By Jonathan Rogers
India's mounting economic and political woes are prompting market players to raise the spectre of a Greek-style crisis in Asia's third-largest economy.
This is not simply idle speculation. Last Friday, the rupee crashed to an all-time low against the dollar of 54.9, and it was stuck most of Tuesday at the psychologically significant Rs 55/USD level, where the currency is seen as having no obvious technical support. (And) the implications of a rupee collapse would be immense.
"It could go to stratospheric levels against the dollar and it looks to me as if the Indian government is aiming at a de facto devaluation in an effort to prop up flagging economic growth. (And) you then have to worry about all the unpleasant boxes such an action would inevitably tick, such as straining further the country's already strained balance of payments as well as bringing on an almighty wave of inflationary pressure," said a credit analyst at a ratings agency in Singapore.
He added that a spike in the rupee would strain the cashflow of corporates and banks as they struggled to service dollar-denominated debt and that the odds of a widespread Indian debt restructuring would be low.
In his opinion, the market will determine the rupee's level, with a formal devaluation seen as unlikely given the consequent need for interest rates to be pushed significantly higher to contain capital flight and counter toxic inflation levels.
This scenario was seen in the UK in 1992 when the country exited the ERM and the government pushed short term interest rates up to 15 percent from 10 percent, spending billions of pounds of reserves to defend the currency in the process.
Should something similar occur to India, it would almost certainly lose its coveted investment-grade rating, with a one-notch demotion required for that to occur. S&P has India on negative watch for its Baa3 foreign currency rating while Moody's and Fitch retain a stable outlook on the country.
As the country's government faces political impasse amid infighting, principally between prime minister Manmohan Singh and finance minister Pranab Mukherjee on the subject of tax reform, and India limps from one corruption scandal to the next, the sense of decay is palpable.
Surprisingly, India's deteriorating economic fundamentals and toxic politics have not yet impacted the relative value of its issuers offshore debt. In fact, on Tuesday India's dollar offshore curve recovered the 10bp it had widened on Monday. But that situation is unlikely to hold much longer.
"As market players start to fret about the possibility of a full-blown rupee devaluation, you will see this start to impact spreads on the country's offshore curve. If the currency goes in a big way, you will have a unilateral replaying in India of the Asian financial crisis, which involved default on short-dated offshore debt and a mass round of debt restructuring. India is hanging in the balance right now, and the worst case scenario seems increasingly likely to play out," said a Hong Kong-based syndicate head.
Just as the tide moves against them, though, Indian corporates are seeing the need for offshore funding increase. According to the credit analyst, many Indian corporates have reached borrowing ceilings with local banks and are sizing up offshore bond issuance as a result. That would be a tall order and an expensive trip, though.
With massive convertible maturities coming up, some in dollars, a local market that is increasingly saturated and has less support from foreign investors and a closed dollar market, it seems inevitable that restructuring will soon become the main activity for Mumbai-based investment-bankers. ALB
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