Sensex and Rupee Fall, Shrugging off Jaitley’s CAD-Containing Measures

New Delhi: Stock markets plunged and the rupee fell on Monday, effectively giving a thumbs-down to the measures announced by the government last week to rein in India's widening current account deficit (CAD) and check financial volatility.

The Sensex fell 1.13% while Nifty declined 1.02% in intra-day trading. The rupee too fell nearly 1% against the US dollar, shedding some of the gains it had made against the greenback in trading last Thursday and Friday.

The 30-share index lost 505.13 points to close at 37,585.51, while the broader 50-share NSE Nifty closed at 11,377.75,losing 137.45 points.

Pronab Sen, India’s first chief statistician, see Monday’s market developments as investors’ lack of confidence in the measures unveiled by the government.

“It appears that the market has not shown much confidence in the measures announced by the government to contain CAD,” Sen told The Wire.

A meeting chaired by Prime Minister Narendra Modi on Friday had decided on a five-pronged strategy including curbs on import of non-essential items and relaxation of conditions for overseas borrowings to allay investors’ concern about the government’s ability to finance its CAD in the face of a surging crude oil market.

India meets over 82% of its crude oil requirement through imports. The global oil market is hardening on supply concerns as the deadline of November 4 for the implementation of US nuclear sanctions on Iran approaches.

Energy market analysts have expressed fear that oil prices could soar above $90 a barrel by the year end. TheUS-China trade war, emerging market volatility and rising oil prices are the key factors weighing on the rupee, according to economists.

Today's developments also bolster scepticism voiced by some economists about the efficacy of the measures unveiled by the government to combat market volatility.

HDFC Bank chief economist Abheek Barua has said that these measures are unlikely to work in the current macroeconomic scenario which is challenging for India.

“In our view, the capital account measures announced on Friday are unlikely to result in any significant shift in fund flows in the immediate future,” Barua said in a note.

“These measures are better suited when the sentiment in the global market is positive towards emerging markets and in general when it is relatively easy for emerging market corporates to raise money abroad,” he added.

For example, the demand for masala bonds from offshore investors is generally driven by the stability of the rupee. In an environment, when the rupee is under pressure, foreign investor would not me much willing to increase its portfolio of rupee denominated assets, Barua explained.

India has seen flight of foreign capital this year on concern of its CAD widening due to high oil prices. Foreign portfolio investors have pulled nearly Rs 48,000 crore out of India during the first six months of this year (January-June 2018). They withdrew a net sum of Rs 41,433 crore from the debt markets and another Rs 6,430 crore from equities market.

Although foreign portfolio investors have been net buyers of Indian debt and equities during July and August, renewed concerns about widening CAD could scare them off.

On the bright side, India received $12.75 billion, nearly 23% higher compared to the same period last year. But FDI alone may not be enough to fund the CAD.

International financial research firm Nomura has projected that India’s CAD could widen to 2.8% of GDP in 2018-19 from the relatively benign level of 1.9% in the last fiscal.

“Overall, we expect the CAD to widen to 2.8% of GDP in 2018-19 from 1.9% in 2017-18,” the Japan-based financial services major said in a recent update.

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