• December 5, 2013, 5:56 PM

Rupee to Fall Further, Private Equity Firms Say

 

By Shefali Anand and Kenan Machado

Agence France-Presse/Getty Images

After a wild ride this summer, India’s currency has been relatively stable in recent weeks, but private-equity investors are preparing for another drop.

The rupee, which by late August had fallen more than 20% against the dollar since the start of the year to an all-time low of 68.80, has for the past month been trading between 62 and 64 rupees per dollar, partly because of special measures taken by India’s central bank that attracted more dollars to India.

Previously, the rupee had strengthened sharply from the end-August low as concerns that the U.S. would cut its easy-money policies abated.

Private-equity investors at an industry conference in Mumbai on Thursday said they aren’t convinced the rupee’s decline is over.

Cheap money from the West will go away eventually, they said, and the rupee’s value will be determined by India’s economic health. In the long term, India’s persistent inflation looks to be a negative factor, as it erodes the purchasing power of the currency.

“Rupee will depreciate in the next few years,” said B.V. Krishnan, managing director at Kohlberg Kravis RobertsKKR -0.60% in India, citing inflation as a depreciation driver during a panel discussion at the conference. Mr. Krishnan said any private-equity firm that doesn’t take steps to prepare for a weakening rupee would be making a mistake.

Private-equity firms expect the rupee to decline by 1% to 3% a year through 2020, according to Delhi-based consulting firm BMR Advisors, based on its recent poll of 24 firms. Within that depreciation range, the currency would fall to between 66 and 74 rupees by 2020, based on the current rate.

Private-equity funds have been hit particularly hard by the rupee’s depreciation this year. These funds had raised money overseas during the boom period between 2005 and 2009 to invest in India. At the time, the rupee was trading at around 40 to 45 per dollar.

Some of that funding is due to be repaid based on the typical pattern of such funds—to return principle and gains to investors after five to seven years.

But the amount they can return in dollars is sharply diminished given that the rupee has lost around a third of its value against the greenback.

“We underestimated the volatility in India—both currency as well as economic,” said Pavninder Singh, Mumbai-based managing director at Bain Capital Private Equity. Mr. Singh was referring  to the sharp slowdown in India’s economy—it is expected to grow at less than 5% in the financial year that ends March 31.

The currency move has also shaken investors who have put money into private-equity funds, typically called limited partners, or LPs.

The rupee is at “the top of every LP’s mind today when they look at India,” said Karthik Athreya, Mumbai-based director at Clearwater Capital Partners, a private-equity firm that invests in Asia.

One private-equity investor who didn’t want to be named said that it is very difficult for India-dedicated funds to raise fresh capital in this environment.

Mintoo Bhandari, Mumbai-based senior partner at U.S. private-equity firm Apollo Global ManagementAPO -0.20%, said at the conference that private-equity firms should also pay attention to the currency risk of the companies they already invest in. Many Indian companies had during the boom taken on dollar-denominated debt, which is turning out to be very expensive to repay.

“A lot of CFOs [chief financial officers] have been blindsided,” by escalating costs associated with foreign debt repayment, Mr. Bhandari said during a panel discussion Thursday.


The conference was organized by the Asian Venture Capital Journal.
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