The Hindu Business Line : Yuan-rupee in focus as China is top imports source

CAPITAL flows into India have remained steady in the first quarter of 2005-06 going by the macroeconomic and monetary developments put out by the Reserve Bank of India.

Foreign direct investment (FDI) has more than doubled in April-May 2005 at $922 million against $434 million in the year-ago period. FDI flows have gone into cement, sugar, plastic, synthetic and rubber industries and hotels, with Mauritius and the US continuing to be the principal origins.

Foreign institutional investment (FII) inflows have been put at $435 million and RBI stated, "FII inflows are likely to remain robust in the near term." American depository receipts and global depository receipts account for $360 million ($170 million), while net external assistance is put at $180 million ($72 million). NRI deposits have been negative at $62 million (minus $397 million), while external commercial borrowing (ECB) approvals are lower at $1,266 million ($1,910 million).

With "the upturn of the investment cycle," corporates could take "significant recourse" to ECBs. Indian corporates seem to prefer foreign currency convertible bonds (FCCBs), as "these bond issues are attractive due to lower spreads and conversion reduces the debt-servicing burden," explained RBI.

In nominal terms, the external debt stock rose by $11.6 billion (10.4 per cent) in 2004-05 — the highest accretion in any single year starting from 1990-91 driven by ECBs, trade credits and NRI deposits. As of now, overseas money is cheaper than rupee loans and at least, the best players could take advantage of this for the takeover of companies abroad.

Most top line corporates have de-linked themselves from the banking system, even while keeping the option alive to take rupee credit from the Indian banking system. There could be some shift if the Federal Reserve continues to mark up interest rates.

In the first quarter of the current fiscal, the surplus in the invisible account and net capital flows were able to finance the trade deficit. Crude is the nub of the issue. The average price for a basket of major international crude varieties (Brent, WTI and Dubai Fateh) at around $52.1 per barrel in April-July 2005 was 12.9 per cent higher over January-March 2005 and 45.1 per cent higher over the corresponding year-ago period. Does that indicate the price of India's crude imports?

"The RBI did not operate in the foreign exchange market during the quarter," says the RBI in a rare admission dismissing market talk as so much vain talk.

The forex reserves fell by $3.1 billion in the quarter as against a rise of $6.6 billion in the corresponding period of 2004-05, "largely reflecting valuation effects."

"RBI's net foreign exchange assets (NFEAs) declined by Rs 20,941 crore (up to July 15) as against an increase of Rs 68,583 crore during the corresponding period of the previous year. NFEA adjusted for revaluation, however, increased by Rs 5,793 crore as compared with an increase of Rs 34,567 crore in the corresponding period last year," RBI stated on Monday. Is the rupee under- or over-valued? And what will the yuan revaluation do to India? The yuan has been pegged to the US dollar since 1994. In this period, China's share in world exports rose from 2.2 per cent in 1994 to 5.2 per cent in 2003. Over the same time, China's forex reserves have moved up from $57.8 billion to $416 billion, said the RBI.

In recent years, India-China trade has been vigorous. In 2004-05, the total trade turnover between the two amounted to $11.3 billion, with a $2.2 billion surplus in favour of China. Bilateral trade moved up 63 per cent in the first quarter 2005-06. India's exports to China have been rising at an annual average rate of 52 per cent in 2000-05.

In fact, China's share in India's trade has gone up from 0.1 per cent in the early 1990s to 6.1 per cent in 2004-05.

China has turned out to be the largest source of India's imports, surpassing the US, the RBI added, which is somewhat of a revelation.

"It is envisaged that the bilateral trade target of $20 billion set for 2008 would be achieved well ahead of schedule and both countries have evinced interest in closer bilateral trade agreements."

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