📰Breaking News: Rupee Breaks 84

Hello. India’s rupee broke the RBI’s soft red line of 84 USD/INR just hours ago. Why did this happen, and will the RBI intervene in the coming hours? We also investigate new bank loan growth and foreign exchange reserve data released by the RBI this morning. Then, we close with Gupshup, a round-up of the most important headlines.

BTW: What percent of India’s population is fluent in English? (Answer at bottom)

Markets

Read here for an appendix on the above.

Analysis

Breaking News: Rupee Breaks 84

The RBI has maintained a soft red line, constantly intervening to keep India’s currency at a USD/INR exchange rate of 83.90. That red line has now been broken, with the exchange rate surpassing 84 just hours ago, currently hanging at 84.04. The Reserve Bank of India may intervene shortly to steer the rate back to around 83.90, a level it has carefully maintained for most of the year.

Surpassing this level could indicate a tidal shift in India’s equity markets amid increasing Chinese inflows and a robust U.S. economy, which may lead global investors to seek attractive risk-adjusted returns.

As noted by Samosa Capital last month, the RBI has consistently prevented the currency from crossing 84, viewing it as a critical threshold to ensure stability in currency and investment flows. 

US and China Good News   This morning, the United States revealed its NFP (non-farm payroll) figure: its economy added 257,000 jobs in September, far exceeding the expected 150,000. US yields came up by 25 bps and due to the correlation of rates and FX, the dollar strengthened significantly amid surging demand for American assets. 

The renewed confidence in the U.S. economy—following recession concerns triggered by a disappointing jobs report in August that led the Federal Reserve to cut rates by half a percentage point—has prompted American investors to keep their funds within the country.

India often competes with China in emerging market portfolios, and Indian equities have fallen this week as Chinese stocks have rallied. India has shed $120 billion over the last five days, while China has added $167 billion in the same period. This comes as a result of China injecting its second-largest stimulus package into its economy last week, causing the largest rally in its stock market since 2008. Western managers have rotated money out of India (and most of Asia) into China.

Foreign Reserves   Throughout the past year, India has been utilizing their foreign reserves to mitigate volatility in the rupee by buying and selling dollars to keep it near 83.90. 

India's foreign exchange reserves have surpassed $700 billion for the first time following a seven-week increase, according to data released by the Reserve Bank of India on October 4, 2024. This surge reflects the country's strong inflows and benefits from the RBI’s well-executed virtuous cycle: using inflows to maintain currency stability, which in turn encourages further inflows.

Good News for Banks   This morning, the RBI revealed that bank loans grew at 12.2 percent, and deposits grew by 13.3 percent. India’s liquidity issues with much faster-growing debt compared to deposits seem to finally be cooling. As Samosa Capital described last month, India’s banking sector faces a deposit-credit mismatch that is holding back the country’s growth.

In short: over the past two years, the loans-to-deposit ratio has been rising rapidly, raising concerns about (1) a liquidity crunch, where banks lack sufficient deposits to sustain financing, and (2) a potential debt crisis, where excessive leverage in the system could collapse if economic growth begins to slow.

Recent bank reports indicate that this quarter, deposit growth has surged to 13.3% year-on-year, outpacing credit growth, which has slowed to approximately 12.2% year-on-year. This marks a reversal from the prior two years where loan growth had been outpacing deposits.

Macro

• India faces rice oversupply after the government limits food exports (BBG). In May 2022, Prime Minister Narendra Modi imposed food export restrictions—first on wheat, then on rice and sugar—to stabilize domestic prices and ensure a steady grain supply for 800 million people, a move that disrupted global markets and angered farmers facing falling prices. Surplus is caused by domestic markets not being able to absorb the additional supply that would usually be sold internationally, causing massive food waste — lack of distribution infrastructure also to blame.

• FTSE Russell has a positive conversation with India’s SEBI about including Indian debt in its bond index (BBG). India has been on FTSE’s watchlist for potential inclusion since 2021, but in March, the organization cited challenges with investor registration, regulatory reporting, and tax clearance as reasons for the delay. The outcome of the next review is expected on October 8.

• Food Price Index rises at the fastest rate since 2022 (BBG). Driven by further grain and energy distribution issues due to conflicts in Eastern Europe and Middle East, food prices rose to their highest level since August 2023, but still down significantly since their peak in 2022.

Equities

• Hyundai seeks $19 billion valuation by raising $3.3 billion during IPO; it will list 17.5 percent of its India unit to be traded publicly (BBG). It will be one of India’s largest IPOs ever by deal size, and Hyundai plans to use funds to expand domestic manufacturing to sell to India’s growing consumer market.

• India’s Piramal Pharma plans to double revenue in five years, in part driven by an $80 million expansion of a Kentucky-based sterile injection facility (BBG). In the last year, 58 percent of revenue came from contract manufacturing; a third-party manufacturing service for pharmaceutical companies.

• Nifty50 fell 2 percent yesterday (Thursday, Oct 3) on concerns of rising inflows to China.

Alts

• Temasek to make a $1 billion investment in Haldiram Snacks, India’s largest distributor of snacks (BBG). Temasek is a Singapore state-backed investor, and is seeking 10 to 15 percent of Haldiram equity, and has deployed $37 billion in investments in India over the last 20 years. The news comes upon rumors Haldiram may be seeking an IPO.

• India to grow solar wafer manufacturing capacity after inking deal with China’s Lipton Technologies (BBG). Linton confirmed it will be supplying manufacturing materials for a 10GW solar power production plant in India. Currently, India produces 2GW a year of solar wafers via Adani Group plants.

• Blackstone wants to raise $10 billion for its third Asia fund (BBG). The company has approximately $50 billion invested in private equity and real estate in India.

Policy

• India and the European Union nearing deadline to close clearing house oversight discussions (BBG). RBI rejected the European Securities and Markets Authority's request to co-supervise Indian transactions, citing concerns about "extra-territorial overreach." The European Market Infrastructure Regulation requires the European Securities and Markets Authority (ESMA) to work with countries that have their own central counterparties, giving ESMA access to their records and control over the types of derivatives European banks can trade. In December, the Bank of England agreed to rely on the Reserve Bank of India's regulation and supervision to help maintain the UK's financial stability.

Oh, and 10 percent of India’s population is fluent in English, making the country’s English-speaking population 125 million. That makes India home to the second largest English-speaking population in the world, after only the United States.

See you next week.

Disclaimer: This is not financial advice or recommendation for any investment. The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.

1 USD = 84.04 Indian Rupee