Regional Focus

India: looking on the bright side

Published: Nov 2013

On 28th August, the Indian rupee experienced its biggest single-day fall in more than two decades, plunging by almost 4% to reach a record low of 68.8 against the US dollar. Since US Federal Reserve Chairman Ben Bernanke first hinted at tapering off quantitative easing (QE) back in May, the rupee fell 16% against the US dollar. Paul Mackel, Head of Asian Currency Research at HSBC, stated that caution towards emerging market assets and India’s long-running structural problems meant the rupee was one of the first in emerging Asia to face aggressive selling pressure.

During the summer when the rupee was at its lowest levels, markets began to question whether India could fund its high current account deficit. “Pressure on the rupee was brought about by the current account deficit, which is structurally driven largely by oil and gold imports, and the fact that India’s export sector remains relatively limited and uncompetitive,” explains Anjalika Bardalai, Senior Analyst, Asia, Eurasia Group.

India has witnessed the most rapid increase in its external liabilities relative to assets in Asia, Mackel wrote in a September report on the rupee. Current account and fiscal balances have been in negative territory since 2008, the report states, and in this respect, India stands out even among its peers.

In its October 2013 ‘Fiscal Monitor’ the International Monetary Fund (IMF) stated that fiscal consolidation in India had become more challenging in light of the rupee’s devaluation and higher global oil prices. It predicts the fiscal deficit will increase to 8.5% of GDP in the 2013 to 2014 financial year. At October’s IMF meetings in Washington, Indian Finance Minister Shri Chidambaram stated that the government was committed to the path of fiscal consolidation and aimed to bring the fiscal deficit down to 3% by 2016 to 2017.

Structural reforms

When it comes to India’s current account deficit, Siddharta Sanyal, Chief Indian Economist, Barclays, says the government has applied pressure to contain imports and has placed restrictions on importing gold. “A depreciated rupee will also help the margins,” he says. In a mid-October research note, Leif Eskesen, Chief Economist for India and ASEAN, HSBC, stated that recent trade numbers suggest the Indian government will reach its 2014 current account deficit target of $70 billion, with a chance that the deficit could narrow even further. But he added that the government and India’s central bank, the Reserve Bank of India (RBI), needed to stick to tight macroeconomic policies and step up implementation of structural reforms to bring about a sustained improvement in the current account position.

Since late August the rupee has appreciated and remained steady in the low 60s. The RBI is expected to further rollback currency stabilisation measures introduced in the summer. But in order to manage expectations, Eskesen stated that the central bank needed to signal its willingness to reintroduce measures should currency risks return. After all, tapering off of QE has merely been postponed. The bank also needs to demonstrate its seriousness in anchoring inflation expectations, says Eskesen. In this respect, HSBC expects an increase (of at least 25bps) in the repo rate this year.

Within days of assuming his new role as governor of the RBI in September, Raghuram Rajan, a former Chief Economist at the IMF, surprised investors by raising the central bank’s key policy rate to 7.5%. His actions left no doubt that Rajan is focused on reining in inflation, which remains stubbornly high. Data published by the Indian Central Statistics Office (ICSO) indicated that the provisional annual inflation rate based on all India general CPI for August 2013 was 9.5% compared to 9.6% for the previous month. “High inflation is a long standing problem in India,” says Bardalai of Eurasia Group.

Turning a corner

For now interventions by the RBI appear to have stemmed the rupee’s decline. Has India’s economy turned a corner? “In terms of the last six months when there was a perception of crisis, I feel a little bit more comfortable,” says Sanyal of Barclays. “I wouldn’t say that everything is absolutely fine, but from the extreme pessimism that we saw on the currency front, that risk perception has stabilised.”

In October, a better current account trend and news of potential portfolio inflows supporting the rupee saw HSBC lower its US dollar/rupee forecast from 65 to 62 for year end, and from 70 to 66 for the end of 2014. But Bardalai of Eurasia Group says the rupee is likely to remain volatile. “The currency is still down 10% to 15% relative to April,” she says, “when it was trading around 54 or possibly stronger.”

Economic growth also remains sluggish. In September Barclays revised its GDP growth for the 2013/2014 fiscal year down to 4.7%. Citing reasons for its decision, Sanyal says interest rates are still high and the government is constrained on the deficit side in terms of its ability to boost growth in the near term. Industrial growth is also low, which according to S. Gopalakrishnan (Kris), Co-founder and Executive Vice Chairman of Indian IT services company Infosys, and President of the Confederation of Indian Industry (CII), contributed to the slowdown in GDP growth in the past two years.

“Industrial activity is very low,” says Kris, “and some months it has been negative, which is a cause for concern as one of the factors for creating jobs is industrial growth.” According to data published by the RBI, the sales growth (year-on-year) of more than 2,900 non-government non-financial (NGNF) companies decelerated sharply to 9.1% during 2012-2013 from 18.5% in 2011-2012. “This is the lowest annual growth in the past ten years,” the RBI stated.

Kris says India needs to create ten million new jobs each year in order to keep pace with the number of people joining the workforce. But when compared with markets like China, India’s manufacturing sector is still relatively weak. “The services sector contributes more to the economy than industry,” explains Bardalai of Eurasia Group. Manufacturing generates just 16% of India’s GDP compared to the services sector, which is 55%. “What holds it back is restrictive labour laws,” says Bardalai. “Land acquisition is also very costly.”

Financial inclusion

The Indian government’s National Manufacturing Policy (NMP) proposes to increase manufacturing’s share of GDP to 25% over the next decade by creating the policy framework and financial instruments to encourage public/private partnerships (PPP) for infrastructure development. Kris of Infosys says India has a fairly robust banking sector and that most companies are able to access financing, but at the moment, he says bank capital is expensive. “That is one of the reasons why the investment ratio to GDP has come down”.

Accessing capital is a real problem for small and medium-sized enterprises (SMEs), according to Bardalai. “Given the fiscal deficit, government borrowing is domestically funded, and all of that government borrowing crowds out the private sector.” In a speech given to a factoring conference in New Delhi recently, RBI Deputy Governor, Dr. K. Chakrabarty urged more banks to launch factoring services particularly for India’s micro-enterprises.

“Delays in settlement of dues adversely affect the recycling of funds and business operations of SME units. It is therefore, critical to ensure that the small entities are able to raise liquidity against their receivables,” he stated.

Anjali Mohanty, Managing Director and Head of Global Transaction Banking (GTB), India, Deutsche Bank, says she is seeing huge demand right now in India for payables financing – otherwise known as reverse factoring. “Borrowing costs have gone up by 200 bps to 300 bps, which is impacting SMEs,” she says. “Given the local liquidity and risk environment, it can be challenging for SMEs to meet their working capital needs from their existing bank relationships.” Although Deutsche Bank does not bank SMEs in India, it does bank large multinationals that do business with them and can leverage the credit rating of these buyers to provide cheaper financing to SMEs in the supply chain.

Growing in sophistication

Nirmal Khaderia, Asia Pacific Head of Corporate Treasury Sales and Head of Global Transaction Services (GTS) India, Bank of America Merrill Lynch (BofAML), says the majority of companies they work with in India are increasingly focused on working capital management. He talks about “a new breed of Indian companies” that are more global in their outlook backed by large overseas acquisitions and international expansion via the organic route.

“Going global means managing liquidity and working capital at a global level, working with multiple clearing systems, multiple currencies, multiple platforms and ever changing regulations. This is a big challenge for them and is when they start looking at consolidation and centralisation, risk management practices, and learning from the experience of other corporates. They talk to global banks like us who have the experience of working with multinationals and learn from our vast experience in treasury management, bringing efficiencies in working capital management and leveraging the concept of shared service centres (SSCs).”

Indian companies’ hedging practices have also grown in sophistication, says Khaderia. “In the past, importers did not do much beyond hedging US dollar payment exposures due in the next 90-120 days.

However, a large number of exporters with long-term contracts actively hedged for periods of 12-24 months to take advantage of the premium. But as the currency market has become more volatile, companies are putting together more robust currency hedging policies.” In India companies are only allowed to hedge genuine exposures and interest rate options are not permitted.

Regulations and currency restrictions also makes liquidity management challenging for multinationals with Indian subsidiaries. As the rupee is not fully convertible, Navin Gupta, Head of Cash Management India, HSBC, says cash concentration and notional pooling is not permitted on a cross-border basis. Domestically, cash concentration is possible. Gupta says some companies in India are interested in cash concentration for multi-entity structures. In this respect HSBC is able to provide bespoke solutions, he explains, that are integrated with a company’s enterprise resource planning (ERP) system and are more likely to win the support of the company’s respective stakeholders. “Only a few banks have the capability to provide this element,” says Gupta.

As Indian corporates become more global, Khaderia says they are increasingly getting into strategic treasury management relationships with global banks not only for their global business but also for their treasury needs in India (a space traditionally dominated by the local banks). “Some of the local banks have developed sophisticated processes around collections and payments backed by strong core banking systems implemented in the last two decades. However, global banks still carry the edge when it comes to customisation and the ability to integrate with the client’s ERP systems, backed by our global technology platforms and information reporting systems.”

Barclays’ experience of the Indian market is perhaps somewhat different to that of most foreign banks. Up until two years ago it maintained a retail banking presence in India; but in 2011 it closed its retail business so it could focus on corporate and investment banking. Barclays says it can now offer financial institutions and corporates much wider product coverage across capital markets, debt, risk management and FX, as well as trade finance, working capital and cash management.

“In India each bank has a particular strategy and particular client segment that it wants to pursue,” explains Ashwini Kapila, Managing Director and Head of Financial Institutions Group, Barclays India. “We defined our client segment in terms of where we believe we can add more value. It is about servicing global relationships coming into India, and large Indian companies looking to expand into other geographies such as Africa, the UK or Europe.”

The move from cash and cheques to electronic payments in India (see table overleaf) is also levelling the playing field between domestic and foreign banks. In an increasingly electronic world, moving money around India no longer requires banks to maintain an extensive branch network. “Most foreign banks in India have a limited branch network,” says Gupta of HSBC. “But in an electronic world you can address every corner of India.”

Mohanty of Deutsche Bank says between 65% to 67% of transactions in India are still physical payments, but 70% of the value of transactions is moved electronically. One of the major challenges India faces is ensuring that financial services are accessible even in the remotest parts of the country where large swathes of the population are unbanked.

India’s central bank hopes to raise the level of banking penetration by issuing new banking licenses. According to RBI’s Chakrabarty, rural India only had seven bank branches per one million adults in 2011, compared with the developed world and other BRIC economies, which had more than 40 branches.

In order to support annual economic growth of 8%, as envisaged by India’s 12th Five Year Plan, Chakrabarty says the banking business needs to expand significantly to an estimated INR288 trillion ($4.7 trillion) by 2020 from approximately INR115 trillion in 2012.

“We expect significant growth of the financial services industry in India over the next few years in terms of diversity of products,” says Kris of Infosys. “Mobile transactions and e-commerce is a huge opportunity; 150 million people have access to the internet, 800 million people have mobile access.”

Despite India’s economic and structural challenges, Kris is encouraged by the country’s significant opportunities for growth particularly when it comes to trade between India and other emerging markets. In its ‘Global Trade Forecast’ published in October, HSBC predicts by 2030 India will be the UAE’s top export destination accounting for 14% of exports. And as developing economies boost spending on large infrastructure projects, India is tipped to be one of the fastest-growing infrastructure import markets over the medium term.

Kris says India has demographics in its favour. “We have a young working population and are one of the few economies primarily driven by domestic consumption. If we can stimulate domestic activity, we will see growth in GDP.” Private consumption is approximately 60% of India’s nominal GDP, says Bardalai of Eurasia Group. “That is what has attracted a lot of foreign investors who are enticed not only by the size of the domestic market, but also by increasing private consumption driven by rising incomes and the mythical ‘rise of the middle class’.”

The Indian government set up a Cabinet Committee on Investment which, according to Bardalai, is supposed to fast-track big-ticket infrastructure investments. “But getting approvals through and starting the investment cycle are two different things,” she says. And with elections scheduled for next year, Bardalai does not anticipate any major economic reforms kick-starting the investment cycle until at least after the election. One major risk to India’s growth story could be further political fragmentation as a result of the forthcoming elections.

India’s vital statistics


1.2 billion1

GDP per capita 2013 (US dollars)

$1,414.11 (IMF estimate)2

GDP percent change 2013

3.8% (IMF estimate)2

Current account balance 2013 (US dollars/billions)

-77.601 (IMF estimate)2

Inflation (average consumer prices) percent change

10.9% (2013) (IMF estimate)2

Ease of doing business (2013) rank

132 out of 185 globally1

Corruption perceptions index (2012) rank

94 out of 176 globally3


  1. World Bank
  2. IMF World Economic Outlook October 2013
  3. Transparency International

“People are waiting to see how the election pans out,” says Sanyal of Barclays. “In the past 20 years, India has had a fragmented political mandate but it has learned to live with no party having an outright majority. If some of the major political parties can form a government that should be okay in terms of the outlook for the economy.” But if the election returns another coalition government that is as fragmented as the current one or even more fragmented, that could lead to continued policy paralysis, says Bardalai.

Evolution of payment systems in India: the journey from paper to electronic

In the last eight to ten years, India’s payments infrastructure has undergone somewhat of a revolution or evolution – call it what you will. From a system that was completely paper-driven comprising mostly cash and cheques, India now boasts an electronic payments (e-payments) infrastructure, which is on a par with more developed markets. Although paper still dominates in terms of overall volumes, in terms of value, more payments in India are now made electronically.

India’s journey from paper to electronic started with the introduction of a real-time gross settlement (RTGS) payment system by the RBI in 2004. “Since then we have had several waves of mini-revolutions on the clearing side,” says Rakesh Garg, Managing Director and Head of Global Finance, Barclays India. “From a payments infrastructure perspective, India wants to be world class and is fast moving toward that goal.”

After RTGS came the low value National Electronic Funds Transfer (NEFT) system, which facilitates electronic funds transfers for individuals and companies between NEFT-enabled bank branches across India. More than 100 banks participate in NEFT and transfers can be made to more than 63,000 bank branches across the country.

The National Payments Corporation of India (NPCI), which is charged with developing the country’s retail clearing systems, launched an Immediate Payments Service (IMPS) in 2010, which provides instant fund transfers between bank accounts using mobile phones. IMPS operates 24/7. Mobile banking is seen as a way of extending financial inclusion, particularly to remote parts of India; however, Garg says it is up to banks to develop mobile applications off the back of IMPS.

As e-commerce grows in India, the RBI hopes to increase the velocity of money via e-payments. “The focus for the next phase of development in Indian payment infrastructure is providing a thrust to modern e-payments that are safe, simple and low-cost for use by all,” writes HSBC and Boston Consulting Group in a report entitled ‘Emerging Payments Infrastructure Enabling Efficient Growth in India’. “The changes planned will thus bring to corporate India the benefits of increased efficiency, wider reach and standardisation.” The HSBC and BCG report highlighted current happenings in India’s payment infrastructure including:

  • The RBI’s effort to drive usage of electronic channels – measures under consideration include taking electronic mandates in lieu of post-dated cheques, reducing time validity of cheques and levying charges on cheque issuance and use.
  • Rollout of image-based clearing using the Cheque Truncation System (CTS) across India in 2013, which will reduce clearing time and risk.
  • A new electronic system for repetitive, bulk payments – National Automated Clearing House (NACH) – covering all computerised branches in India and offering faster settlement, will be rolled out across banks in 2013.
  • Financial inclusion and access to unbanked population to be supported through measures such as interoperability via banking business correspondents.
  • Introduction of the Aadhaar number (ID card) to enable banking of people who are so far outside the realm of formal banking and facilitation of government initiatives, such as direct cash transfers.
  • Enhanced controls on existing and new systems to reduce fraud, as well as a shift from proprietary formats to standard and internationally acceptable formats.

The RBI recently announced the launch of a new RTGS system that supports the ISO 20022 XML messaging standard. India’s work is far from done though; BofAML’s Khaderia says at present, the clearing infrastructure supports push-based settlements and clients need to rely upon distributors/remitters pushing money to them. “A game-changing initiative on the electronic payment is NACH debit facility which enables clients to use pull mechanism for receivables. It is envisaged that the NACH debit facility will gradually eliminate a large number of cheques in the years to come.”

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