India-focussed private equity (PE) funds may see a silver lining in the weak rupee for deploying new investments. This is despite the concern around high inflation and slowing economic growth.
A falling rupee presents a good opportunity for investors who have already raised funds in dollars and looking to invest in India, say industry experts. For example, an investor today can invest about Rs 55 for every US dollar, though in 2010 the rupee investment would have been lower — he would have got only Rs 46 for the same dollar.
“Though the question of investing in India is decided by many factors, its absolutely a good thing for investors who have raised funds for investing specifically in India and have opportunities to park their funds here,” said Mr Shobhit Agarwal, Managing Director at Protiviti Consulting.
Strong Gains
Not only is it a good time to invest, if the rupee arrests its falls and makes some gains against the dollar, investors' putting in money today will see much better returns. “By the time they decide to liquidate and if the rupee strengthens, the returns will be exponentially higher,” Mr Agarwal said.
“Rupee will go up depending on capital flows. Debt repayment of over $45 billion is due, apart from repayment on short-term financing for oil imports. The current account deficit of about $65 billion also has to be financed either through FII inflows or PE,” said Mr Rahul Bhasin, Managing Partner of Baring PE Partners India.
According to Grant Thornton, 35 PE deals valued at $0.74 billion were struck in June this year, a two-and-half-times jump over June 2010 when the total value was $0.30 billion (16 deals). This, however, was 26 per cent lower as compared to $1 billion (40 deals) worth PE deals struck in June 2011.
Positive signals
Mr Mahendra Swarup, President of the Indian Private Equity & Venture Capital Association said, “PE activity has grown in the last three months. I think there are early signs already that fund raising has become easier.”
Analysts feel that the rupee has already hit its short-term low of Rs 57, and the Government and RBI is not likely to let it deteriorate further. This is because though a weak rupee favours exports, it balloons the cost of imports — primarily for oil. And with India importing over 80 per cent of its oil needs, a weak rupee hurts the economy.
Tough for Exits
But the weakening rupee is not good news for PE funds which have substantial investments in India. “The weak rupee mostly affects investors who put in their money about 3-4 years ago,” said Mr Darius Pandole, Partner at New Silk Route PE. This may prompt them to delay their exits as the IPO market is not all that robust in the current economic environment.
Mr Bhasin said theoretically money should now be rushing in into India. But, global lending capacities and risk appetite is low today because of Europe’s precarious economic situation. Adding to this, the slow pace of reforms in India and the ballooning subsidy costs, are not helping investor confidence.
“There are a lot of challenges that we don’t have a control over. But the sad part is that the Government did not move at the right time and let the deficit balloon. Where are the austerity measures that were being talked about?” he asked.