Tags: Roach | India | wake-up | Fed

Stephen Roach: Indian Currency Crisis a 'Wake-Up Call'

By Michael Kling   |   Wednesday, 11 Sep 2013 08:23 AM

India's currency crisis should be a "wake-up call" for investors, warns Stephen Roach, a Yale University senior fellow. In fact, he's turning bearish on India.

"I've been a big fan and very optimistic on India for a number of years but I'm really having serious second thoughts right now," said Roach, former chairman of Morgan Stanley Asia, told CNBC. "I certainly worry that there is a crisis that might spread and that would be a most disturbing development."

Investors seeking higher yields had flooded into emerging markets while the Federal Reserve kept U.S. yields low with its bond purchases. But when the Fed announced that it might start decreasing those bond purchases this year, investors yanked money out of emerging markets, expecting yields in those countries to become less favorable.

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But that only partly explains why the Indian rupee has fallen almost 19 percent this year, he explained. India has failed to implement needed structural reforms, control its ballooning budget deficit and open its market to direct foreign investment.

"It's still a rigid, bureaucratic society with inadequate infrastructure, insufficient savings and I think this crisis is a real wake-up call for India optimists like myself," Roach stated. "India is long on excuses and short on action. The current administration of India is really an embarrassment to a nation that was so promising."

A recession is possible, he warned. "I hope that's not the case and it's not my forecast, but I wouldn't rule it out with a plunging currency creating the need for monetary tightening that would take a toll on the real economy."

India is better off than emerging markets that suffered in the Asian financial crisis in the 1990s since it has more foreign exchange reserves and its central bank has not made the mistake of burning through its reserves in a futile attempt to defend the its currency, according to the GlobalPost.

Still, the country faces problems.

"The fact of the matter is that 25 percent of corporate India today technically does not have adequate money to make its interest payments, and 15 percent of corporate India has negative cash flows," Morgan Stanley's Ruchir Sharma told GlobalPost. "When you look at that kind of territory you know that the corporate system is under a lot of stress."

Some of India's largest companies are unable to get help from equity markets.

"Looking at valuations at that point doesn't really matter," Sharma added. “If companies are making losses or don't have adequate money to cover their debts, it's just too bad."

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