India pushes for joint FX intervention; action unclear at this time
Tuesday, 3 September 2013 00:00
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REUTERS: India is seeking support from other emerging market countries for coordinated intervention in offshore foreign exchange markets after a currency rout the past three months, but at least one critical partner, Brazil, said it is not involved in such planning at this time.
Mexico and Russia, two other key developing nations, had no comment on such a plan.
Concern about the end of cheap dollars from the US Federal Reserve’s stimulus program has prompted a massive capital flight toward dollar-denominated assets. The rout has been compounded by short-seller attacks in offshore trading centres.
“It is now time to stop,” Dipak Dasgupta, the Indian finance ministry’s principal economic adviser, told Reuters on Friday, referring to speculative behaviour in offshore markets he said was damaging the stability of the world economy.
“It is going to happen in a matter of days rather than weeks,” he said. “Brazil and India can start the move.”
Other major emerging market economies have either rejected outright involvement in any intervention, or declined comment. Brazil’s central bank and its finance minister Guido Mantega said the Government was not currently participating in any planning for co-ordinated intervention in offshore markets.
Mantega said the leading emerging market nations that form the BRICS group, including Brazil, Russia, India, China and South Africa, are planning coordinated actions to create a joint bank and a joint reserve fund.
The Indian rupee is the worst performing major currency in recent months, having lost about 20% against the dollar since May to hit an all-time low. Other hard-hit emerging market currencies include the Brazilian real, which has fallen more than 14% and the Indonesian rupiah, which has slid nearly 12% in 2013.
The idea of intervention did not come up at a Kremlin briefing earlier on Friday looking ahead to the annual Group of 20 summit in St Petersburg on 5 to 6 September.
A meeting of BRICS finance ministers on the fringes of a G20 gathering in Moscow in July made no progress on setting up a joint currency fighting fund, sources said at the time.
Russian officials have not shown any great concern over recent declines in the rouble to four-year lows, describing them as normal fluctuations. They have argued that a weaker currency will boost the export competitiveness of Russia’s flagging economy.
Coordinated action among major emerging economies to support their depreciating currencies against a buoyant dollar had been mentioned in June by Brazilian President Dilma Rousseff in a phone call to her Chinese counterpart. The BRICS nations fretted about the global turbulence at a July G20 summit in Moscow, but no action materialised. G20 leaders are due to meet in St Petersburg next week.
India’s Dasgupta said there had been correspondence among several countries on the plans in the last few weeks and predicted that action would now come quickly, but he declined to share specific details of the discussions.
He said the conversations were not limited to BRICS nations. It was not immediately clear how many takers there were for such a proposal from other major emerging economies.
Rupee gets reprieve
Comments from the Indian official extended the rupee’s gains on Friday to 65.72 per dollar from 65.85 after the currency slumped to a record low earlier this week. The Government in New Delhi is struggling with the weakest economic growth in years and a yawning current account deficit.
“Any steps in this direction will not lead to more than short term 2-3% gains, which will be quite difficult to trade anyway and may lead to more long term damage,” said Bhanu Baweja, head of EM FX and debt strategy, at UBS in London.
When the idea for coordinated action surfaced earlier, analysts said that, unlike their wealthier counterparts at the G7 group, the BRICS were still far from either coordinating monetary policy or jointly intervening in forex markets. Separately, the BRICS countries have been working during the past year on a $100 billion reserve fund and a joint development bank to reshape the global financial architecture long dominated by rich nations. These new institutions are expected to take some time to materialise.
“No force can stop them”
Offshore markets developed to allow foreign investors to hedge or speculate on emerging-market currencies when exchange controls in those countries made it difficult to trade directly in the domestic spot market.
Dasgupta said such markets had exerted pressure on 12 of the main emerging market currencies, including Brazil, China, India, Russia, South Africa, Turkey and Malaysia.
He said that, acting together, even four or five members would have estimated international reserves of $1.2 trillion. With China, the total reserves exceed $6 trillion, he said.
“Once they decide they will move to intervene to mutually support each other to put a floor, there is no force that can stop the impact,” he said.
Non-deliverable forward (NDF) markets operating mainly from Singapore, Hong Kong, New York and London allow trade in several Asian currencies, including the rupee. They allow investors to bet without ever having to physically exchange the currency involved.
A report by the Indian central bank in August said NDFs were affecting the rupee’s value. Indian central bank Governor Duvvuri Subbarao in July said he would rather there were no NDF markets.
One Indian Government estimate puts global trading of the rupee at $60-$70 billion per day.
