As per the latest reported data (7 January 2022), RBI was holding a total of US$632.7bn in non INR assets. This includes US$569.3bn foreign currencies, US$39bn gold, US$19.1bn SDRs and US$5.2 reserve position in the IMF.
Considering our emotional attachment to gold, I
would like to categorize it as emergency reserve only. So effectively, RBI has
US$569.3bn worth of foreign currency to meet the regular demand.
Considering an expected trade deficit of
US$200-220bn for FY23, we appear adequately covered for monetary tightening by
global central bankers and consequent unwind of USD carry trade potentially
leading to FPI outflows.
Assuming, that the global central bank monetary
tightening is able to reign the runaway inflation, and India inflation remains
at midpoint of RBI target range, we may end up with 2-2.5% INR depreciation for
the year, implying end FY23 exchange rate (INR/USD) of 75 to 75.5; of course,
not a matter of much concern.
Some recent news headlines have drawn attention
to the impending redemption of US$256bn foreign debt in 2022 (see
here). This is ~44% of the total last reported US$596bn external debt
(September 2021). Some reports have presented the situation as challenging,
given the tightening monetary conditions overseas.
Some analysts have drawn attention to the fact
that the pace of forex reserve accretion has slowed down in 2021. RBI added
US$124bn to its kitty in 2020, while 2021 addition was only US$48bn. Material
outflows on account of net negative FPI flows resulting in larger than
presently anticipated current account deficit could potentially result in a
mini crisis; though not to the tune of what we saw in 2013.
In this context the following points are
noteworthy:
(a) Private
commercial borrowings (ECBs) are largest component of this debt with ~37%
share; followed by NRI deposits ~25% and short term trade credit (~17%).
(b) Only
about 52% of India’s external debt is denominated in USD. Over ~33 is actually
INR denominated debt. Rest is ~6% (JPY); ~3.5% EUR) and ~4.5% (SDR).
(c) Non-Financial
companies owe ~41% of India’s foreign debt. This includes top private and
public sector corporations. Deposit taking lenders owe ~28%; government ~19%
and other financial corporations owe ~8%. About 5% is intercompany lending.
(d) Of
the total debt due for repayment in 2022, about 40% is owed by deposit taking
lenders (Banks and NBFCs). Most of this is long term debt maturing in 2022.
Obviously, these borrowers would have made adequate arrangements to repay/renew
this debt. About 50% is owed by other corporations and mostly comprises of
short term trade credit that mostly keeps on renewing automatically. (See
details here)
I would also like to draw attention towards the
following recent headlines:
Ø RIL raises US$4bn in 10 to 40yr debt at coupon rate ranging between
2.8% to 3.8%. The offering was oversubscribed 3 times. Out of this US$1.2bn will
be used to repay the debt becoming due for repayment in 2022. (see
here)
Ø Including RIL, a total of US$6bn debt has been raised in first two
weeks of January alone. Corporations like SBI, JSW Infra, Shriram Transport
Finance, India Clean Energy etc. have been able to reduce their borrowing cost
by 30-35bps in these renewals. (see
here)
Ø The global arm of UPL Limited has raised US$700m to repay its older
debt at 35bps lower cost. The proceeds of the loans will be used to repay part
of the debt it had raised to fund the $4.2-billion acquisition of Arysta Life
Sciences in 2019. The company has redeemed US$410m debt recently and plans to
repay more in 4QFY22. (see
here)
Obviously, raising money overseas may not be a
challenge for corporate India. Reduction or complete elimination of QE money
may not be a significant credit or currency event for Indian economy in 2022.
Insofar as the lower addition to new forex reserve by RBI in 2021 is concerned,
it may be due to change in RBI stance toward liquidity (buying USD from market
involves increasing INR liquidity). Net FPI outflows were not much as secondary
market selling was mostly offset by primary market buying.
The real potential challenge for Indian Economy
and INR could come from the following:
1. The
Central Bankers fail in reining the inflation despite monetary tightening, as
the inflation presently is mostly a supply driven phenomenon. India’s crude
cost import cost crossing US$100/bn could put a serious pressure on current
account.
2. Persistent
erratic weathers across the globe could further deteriorate the food supply
situation leading to further rise in global food prices.
3. A
major geopolitical even could cause temporary supply restriction further
worsening the present logjam at major ports hampering exports and exacerbating
supply challenges.
4. Outbound
FDI outpacing the incoming FDI, as more Indian businesses look to establish
local presence in foreign jurisdiction to counter hyper nationalism or
continued mobility restrictions.
