MUMBAI: India’s meteoric rise up the World Bank leader-board for ease of doing business points to further appreciation of the rupee against the dollar, with brightening prospects for New Delhi’s sovereign rating and the broader markets likely bringing more overseas capital into Asia’s third-biggest economy.
The local unit is likely to be among the top five best-performing Asian currencies yielding more than 7% total returns until the end of next year, outpacing China, data from Bloomberg show. Forecasted Total, as the prediction is known in Bloomberg parlance, is the rank on total expected returns in a currency.
The rupee gained 15 paisa, or about 0.23%, to close at 64.60 to a dollar, its highest level in about a month and a half after India broke into top 100 of the world’s best countries from the standpoint of the ease of doing business. The central bank may then have intervened to curb a sharper appreciation, dealers said.
“The rank improvement will yield dividend over a period of time,” said Ashish Vaidya, executive director and head of trading and asset liability management at DBS Bank. “More foreign direct investment flows will pour into the country, with extended reforms triggering a possible sovereign rating upgrade.”
Global investors have gained confidence after India improved its World Bank’s Ease of Doing Business rankings to 100thposition from 130 a year ago. It is now one of the top 10 improved countries.
A series of reform measures, including the Insolvency and Bankruptcy Code, the Real Estate Act, and the Goods and Services Tax, may have played a role in shoring up India’s ranking.
In the past two financial years, gross annual flows of foreign direct investment have been in the range of $55-$60 billion, central bank data show.
“This should improve the country’s rating, which in turn should get better debt pricing for Indian companies,” said Madan Sabnavis, chief economist at Care Ratings. “Higher foreign direct investment flows will help strengthen the currency as well.”
According to an estimate by Care Ratings, India can expect an increase of 5-10%, or about $3-6 billion, in annual foreign direct investment flows from next year.
“India received a much needed stamp of approval from World Bank,” said Anindya Banerjee, currency analyst at Kotak Securities. “It can be seen as the stepping stone toward a sovereign ratings upgrade. We are operating in a world of ‘savings glut’ where excess savings are desperately looking for productive assets.”
Foreign direct investment flows are now running at 1.5-2% of GDP annually, and the share could easily double, dealers said.
“India’s EoDB rank improvement will certainly validate the perception of the improving business climate among foreign investors,” said Axis BankBSE -0.55 % chief economist Saugata Bhattacharya. “An improving investment climate and the overall regulatory and licensing process upgradations will act as tailwinds to a decision on sovereign ratings.”
Source: economictimes.indiatimes.com