India, the second most populous country in the world, faces one of the most volatile times in its recent history. A torrent of funds has fled emerging markets since May but India has been particularly vulnerable as it faces significant headwinds, from a gaping 4.8% current account deficit to its elections next year.
The Indian rupee has been hard-hit, depreciating by close to 20% against the dollar. The Indian government has been trying desperately to stem the tide of outflows, but Indian companies feel that the government ought to move with more alacrity and are calling for swifter action.
Large exporters such as London-listed Vedanta Resources, for example, are keen to see a faster approval process.
“The fast depreciation of the rupee does not help the country. Given India's huge natural resources wealth, the mining sector has immense potential to give a boost to GDP growth and reduce the current account deficit. Vedanta is one of the largest exporters from India with exports of over $5 billion,” said Ashish Garg, vice-president, corporate finance at Vedanta Resources.
“Every barrel of oil that Cairn India produces saves India dollars as it reduces its oil imports. Cairn has potential to increase production at its Rajasthan field by at least 50% in the near term. Faster approvals and policy simplification would allow Cairn unleash its full potential sooner,” he added. Vedanta Resources has a 58.5% stake in oil and gas company Cairn India.
As an exporter, Vedanta Resources benefits from a weakening rupee - almost 90% of the group’s revenues are linked to the dollar, while half its costs are rupee-linked.
However, scores of other companies are not so lucky. Indian Oil Corp, the largest oil refiner in the country by refining volumes, for example, has seen its earnings adversely affected by the rupee’s slide. The company imports most of its crude oil from overseas, distils it and sells diesel, kerosene and cooking gas at government-controlled prices – in rupees - in India.
Since May, the Indian rupee has depreciated by close to 20% against the dollar, making its imports more expensive. “We import 80% of our crude oil requirements and payments are linked to the US dollar so the rupee depreciation is definitely affecting our crude payments,” said PK Goyal, director of finance at Indian Oil Corp in an interview with FinanceAsia.
While Indian Oil Corp is able to pass on the increased costs caused by the currency’s dramatic slide for most products - including naptha and bitumen - to its industrial customers, it is limited to small price hikes for the three controlled products such as diesel, kerosene and cooking oil, which means that it incurs a loss when it sells these products to consumers.
While the government provides a subsidy that helps Indian Oil Corp recoup its losses for selling diesel, kerosene and cooking oil at below-market rate, the bulk of the subsidy comes in the fourth quarter. Now, with the government facing a gaping current deficit, it has proposed reducing this subsidy.
The price at which the government reimburses refiners for selling these three products at below market rates is determined by a complex calculation, but the government is considering changing the calculation to a so-called export parity model. Prices would be based on export prices and exclude import duties and transportation costs, which would greatly reduce the subsidy.
Few expect the government to adopt such an aggressive stance – as this could wipe out the profits of India’s major refiners. But this, along with the government’s plan to sell a 10% stake in Indian Oil Corp, has been an overhang over the stock, which has shed 14% year-to-date.
Funds have been quick to sell out of emerging markets from Indonesia to Brazil since Ben Bernanke first hinted that the US Federal Reserve would reduce its massive purchases of US Treasury bonds in May. But they have been fleeing India faster than most, and this has destabilized the rupee. Mutual funds tracked by EPFR, pulled out $2.2 billion from Indian equity markets from May 22 to August 28. During the same period, investors redeemed $813 million from dedicated India equity funds.
See the upcoming issue of FinanceAsia magazine for the full version of this story.
