The bearish case for Indian rupee in 2016

In spring 2011, an Indian celebrity financier visited the NRI Jay Gatsbys in Emirates Hills pitching his firm's latest private equity fund. I declined to invest because then-RBI governor Subbarao was doing Congress' bidding with a 20 per cent rise in the money supply. I wrote successive articles in KT predicting a major depreciation in the Indian rupee and warning my friends to beware the India Shining hype and rupee risk. At an investment conference in London, an Indian bank CEO told me I was clueless about the rupee since I was from the other side of the Radcliffe Award, that the rupee was headed to 35 against the dollar. As always, time will tell, I responded.
Fast-forward to August 2013; the Indian rupee fell to 68 and the captains and kings (Amils/Bhaibans!) of Emirates Hills lost 50 per cent of their capital due to rupee depreciation alone.
So I watch the fall of the Indian rupee to two-year lows at 66 with deep concern. The Fed rate hikes coincide with offshore money outflows from Dalal Street, the reason the Sensex was slammed to 25,000. Conventional wisdom states that RBI Governor Rajan - India's Paul Volcker - alone is sufficient to stabilise the rupee. Wrong. The Indian rupee can well fall to 74 against the US dollar in 2016. Why?
India's banking crisis is slowly morphing into an external debt crisis. This was the reason the rupee was Asia's worst-performing currency in November 2015, even though crude oil collapsed 12 per cent even before the Vienna debacle. True, RBI reserves are $350 billion, well above the August 2013 "taper tantrum" levels at $275 billion. Yet these reserves are a mere 16 per cent of GDP, far below, say, Singapore's 100 per cent or Taiwan's 84 per cent of GDP. India's foreign debt and external liabilities have risen alarmingly even as the current account deficit has narrowed to two per cent of GDP, thanks to a $60 billion crude oil import bill windfall. Note the almost $100 billion in short term hot money, offshore borrowings and NRI deposits via Dr Rajan's concessional swaps during the rupee crisis of August 2013. India's net international investments (assets liabilities) is now an alarming $370 billion, a six-fold rise since the 2008 financial crisis. Offshore hot money, short term borrowings and trade credit done is $300 billion.
India's foreign reserves are low compared to its external debt, a kiss of death for the rupee in a higher Fed rate and King Dollar milieu. India's external debt (government and private) is now a dangerous 1.45 times state reserves Short-term external debt is 25 per cent of sovereign reserves. The real sword of Damocles for the Indian rupee is the surge in private sector external borrowings, now a staggering 19 per cent of GDP. This is primarily due to a binge in Corporate (oligarch?) India's external commercial borrowings, bank loans, notes and bond issues floated in Vilayetistan. These tripled in Congress' second term and are eight per cent of GDP, a sad indictment of Dr Manmohan Singh's economics legacy. It is obvious that New Dehli allowed Congress's darling oligarchs to run amok in the world's debt private placement and syndicated loans markets.
India's private sector is leveraged and faces a short US dollar funding mismatch that will spell disaster in 2016 as King Dollar continues to rise. Indian banking's non-performing/restructured loan ratio is a shocking 11 per cent of all loans in 2015, the reason Dr Rajan ordered a hike in provisions. Private sector debt has basically doubled in the past decade. To borrow a Churchillian metaphor, never in the history of Indian capitalism have so few owed so much to so many. Corporate leverage is at dangerous levels at a time when world trade is shrinking, $200 billion in bad loans gut the banking system and a fall in inflation has raised real borrowing costs. This is the worst possible global economic and monetary environment to have an external debt crisis. The IMF has warned India about its high foreign exchange leverage. The IMF estimates that 60 per cent of Indian corporate debt is at risk given the US dollar/Fed rate shock. While the RBI will manage the rupee's fall, it will not prevent it, if only because the currency wars have now come to Mumbai, thanks to the Chinese Politburo. The offshore debt chickens of India Inc will come home to roost in 2016.