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Indian Rupee Slide A "Clarion Call" To Reformers; China's Economy Allays Some Fears

Tom Burroughes

28 August 2013

An unsettling period for stock indices and economies in recent weeks, compounded by the latest concerns about conflict in Syria and Egypt, have prompted wealth managers to wonder whether the euphoria that has been associated with emerging markets is dead.

In the case of India, suffering stock market wobbles and a sharp drop in the exchange rate of the rupee, policymakers have been chided for failing to live up to reform expectations. The MSCI India Index of the country’s equities is down 18.6 per cent since the start of this year.

The Indian currency has lost more than 16 per cent of its value against the dollar so far this year. According to Reuters, it is the worst performing Asian emerging market currency, despite efforts by the government to support it and statements from the administration that the currency has been oversold. The rupee yesterday fell to a record low of 66.075 to the dollar on Tuesday.

At Matthews Asia, the fund management firm, the fall in the rupee should be a “clarion call to bring in much-needed reforms in order to attract foreign capital”. So argues Sharat Shroff, portfolio manager at Matthews Asia. The firm is concerned that India’s policymakers are drawing the wrong conclusions about the current state of the rupee. 

“Recent measures announced by the Indian government and the Reserve Bank of India (RBI) suggest that policymakers are viewing the rupee movements as a short-term issue while paying less attention to some of the structural problems confronting the economy. Hence the measures seem to focus on reducing the country’s need for US dollars. The efficacy of such measures is questionable,” Shroff said.

“The government may be aiming to plug the gap in funding India’s current account deficit by increasing reliance on shorter-term sources of funding. While these measures may work in the interim, there must be a concerted effort to attract more sustainable sources of capital, and that can be achieved by easing the cost of doing business and by improving domestic business competitiveness. Unfortunately, the country’s attempts to improve competiveness in recent years have been half-hearted,” he said.

China

Over at the world’s second-largest economy, a move by policymakers to rein in rapid credit growth and try and steer the country away from a strong export focus to more domestic-driven growth has produced more than its share of growing pains. There are also regular concerns about mal-investment – “bridges to nowhere” – and general misallocation of capital due to state planning. The MSCI China Index is down by 4.1 per cent. At BNP Paribas, however, the French bank this week issued a relatively upbeat note.

“We tend to believe the growth recovery would continue given the government has taken a series of policy measures helpful for retaining the strength in growth. Therefore, we believe current growth momentum would be sufficient for the government to achieve its targeted growth rate (7.5 per cent) for 2013, but also feel there is greater upside than downside risks,” the bank said.

“We maintain our belief the government would shift policy priorities to reform and restructuring in 2014 and beyond. The growth target is to be set lower at 7 per cent; a central level in a range between 6.5-7.5 per cent for 2014. We forecast GDP to grow 7.3 per cent in 2014 against 7.6 per cent in 2013,” the bank said.

BNP Paribas pointed out that a whole group of statistics showed that China’s economy gained vigour in July compared with June. A purchasing managers’ report, for example, defied market expectations at 50.3 (a figure above 50 shows an expanding economy, and below, a contracting one).

Meanwhile, value-added industrial output rose by 9.7 per cent in July, up from 8.9 per cent, although the pace of growth decelerated from 9.9 per cent. BNP Paribas said annualised VAIO month-on-month growth is high, at 11.1 per cent.