Rupee Drops on Weakness in Indian Economy

MUMBAI — The Indian rupee began slipping lower again in currency markets on Monday after a two-day respite late last week, as further signs emerged of broad troubles in the Indian economy.

An HSBC survey of purchasing managers at manufacturers across India, released Monday, showed them to be the gloomiest they had been since March 2009, at the bottom of the global economic downturn. Businesses across the country are bracing themselves for a sharp increase in the regulated price of diesel fuel, as the rupee’s steep drop in August has driven up the Indian price of crude oil, priced in dollars and almost entirely imported.

After staying nearly steady through the morning, the rupee began sliding again by early afternoon and by late afternoon was down another 0.5 percent against the dollar, to 66.08 rupees to the dollar, bringing its losses since early May to almost 20 percent. Currency traders said that they perceived hints of modest intervention to cushion the decline by the Reserve Bank of India, the country’s central bank, which acts through state-controlled commercial banks when it does intervene so as to camouflage its activity.

The Mumbai stock market showed signs of recovery on Monday, with the benchmark Sensex index rallying 1.43 percent by late afternoon.

Some economists say that the economic downturn may prove sharp but brief. Ajay Singh, a professor at the National Institute of Public Finance and Policy, predicted that exporters would benefit considerably from a cheaper rupee and would soon start expanding output.

Yet poor roads, restrictive labor laws and heavy regulation have left India with a manufacturing sector that, although stronger than a decade ago, still struggles to compete with China and other East Asian economies. Indian companies rely heavily on imports for materials and equipment that they cannot buy within India, and the costs of those imports are surging as the rupee falls, limiting gains in Indian competitiveness.

At Challenge Overseas, a manufacturer of trousers on the northern outskirts of Mumbai that exports mainly to the Mideast, the floor and corners of the factory were piled high over the weekend with thick gray and black rolls of fabric two meters, or six feet, long and 30 centimeters, or 12 inches, thick. But all of the fabric had been imported from China.

“Our owner goes to China every three months,” said Javeri Savia, the general manager of production. “The newer textures and weaves all come from China.”

Like many Indian factories, Challenge also lacks economies of scale: It has just 60 workers to cut, sew and iron its trousers, which sell at wholesale for about 1,000 rupees, or $15, apiece. Similar factories in China often employ several thousand workers. “When you compare with China and all of them, we are peanuts,” Mr. Savia said.

The rupee traded between 52 and 55 to the dollar until early May, when it began a gradual slide that the Indian government tried to arrest through market intervention and other measures, including raising the tax on gold imports. The rupee continued drifting down through the summer, then began falling faster in mid-August when senior government officials made it clear in speeches that they were reluctant to resort to more drastic measures to arrest the rupee’s decline, like sharp increases in interest rates or an imposition of stringent controls on moving large sums of money in and out of the country.

The rupee briefly nose-dived last Wednesday to almost 69 to the dollar, prompting the Reserve Bank of India to supply dollars from its reserves through a local bank to the country’s state-controlled oil refiners and distributors, who tend to be India’s biggest buyers of dollars so as to pay for crude oil imports. The rupee slowly crawled back above 66 to the dollar on Thursday and Friday before drifting down a little on Monday.

Paritosh Mathur, the head of fixed-income and currency trading in India for Deutsche Bank, said that volatility in the rupee’s value appeared to be diminishing. He said that he saw little chance that the rupee would return to its levels of last spring in the next two or three months, but also little chance that it would test again the lows of last Wednesday.

The HSBC index of purchasing managers’ sentiment fell to 48.5 in August, from 50.1 in July. A figure below 50 indicates a contraction in activity. Overall new orders and new export orders both declined. Purchasing managers also indicated that they were buying less material for future production and were keeping smaller inventories of finished goods on hand, apparently in anticipation of weak sales.

Leif Eskesen, HSBC’s chief economist for India and southeast Asia, cut his forecast for Indian economic output to 4 percent for the Indian fiscal year through the end of next March, from a previous forecast of 5.5 percent. He also cut his forecast for the following fiscal year to 5.5 percent, from 6.6 percent.

“The recovery is likely to prove protracted as confidence will only return reluctantly and the structural reforms will only pass through to growth very slowly,” he said in a research report.

Julian D’Souza, the South Asia director in the Mumbai office of the Conference Board, a group based in New York that issues leading economic indicators, said that many manufacturing industries were hobbled by high transport and electricity costs. But auto parts factories tend to have modern equipment and good locations close to ports.

“That’s one area where India can start exporting,” he said.

American and European auto parts makers are already facing heavy competition from China, however, so further exports from India might fan trade tensions.

Neha Thirani Bagri contributed reporting.

Moody's Warns of Weakness in German Banking Sector

FRANKFURT — The debt ratings agency Moody’s Investors Service provided a reminder Friday that the vaunted German economy has a major weakness: its banking system.

In a report, Moody’s warned that German banks suffer from meager profits, rising risk and insufficient reserves to absorb losses. The rating agency reaffirmed the negative outlook it has assigned to German banks since 2008.

The poor state of German banks seems surprising considering that the country’s economy has held up fairly well to the euro zone crisis. In addition, German banks benefit from the country’s status as a haven from the turmoil and are able to borrow money at much lower rates than counterparts in other European countries. There is no real estate bubble and households are not over-indebted.

German banks did, however, invest heavily in countries like Spain and Italy before the crisis, because they could earn more profits there than at home. Four years after the financial crisis began, they remain exposed to problems in those countries, Moody’s said.

In addition, Moody’s said, Germany still has too many banks in relation to the size of the country. The oversupply pushes down lending rates and profits.

“Intense competition and low interest rates are causing margin pressure that will likely further erode already-weak bank revenues and profits,” Moody’s said in a statement early Friday.

The combination of low profits and high leverage “will make it difficult for many German banks to cope with major (unforeseen) losses,” Moody’s said.

The report comes after European leaders meeting in Brussels until early Friday agreed on legislation that will concentrate banking supervision at the European Central Bank, a measure aimed at preventing national regulators from favoring their own banks. Weak regulation is blamed on problems in Spanish banks. But the leaders were vague on when the new regulatory regime will take shape, apparently in deference to German political sensitivities.

German leaders have resisted giving up supervisory control of smaller and mid-sized banks, which are often owned by states or municipalities and are a formidable lobby in Berlin.

Moody’s examined 41 large lenders which it said accounted for 85 percent of loans in Germany. But it noted banks it did not include in the report may also be vulnerable. “Many of the more retail-oriented German savings banks and local cooperative banks are less stressed, although they, too, face growth and margin pressures,” Moody's said.

Most of the debate in Europe has focused on Spanish banks like Bankia, and the cost to the government of rescuing them. As in Spain, though, many German banks are partly or wholly owned by local governments. Their lending decisions can be skewed by political considerations, and the owners are reluctant to close them or reduce them in size when business declines.

“The long-standing structural weaknesses of the banking industry have not changed,” Moody’s said. “The system remains overbanked, fragmented and fiercely competitive.”