After a modestly weak start, India's FX and stock markets accelerated lower overnight in the currency's second biggest daily collapse in 17 years, and stocks second biggest daily plunge in 2 years. Rubbing further salt into an already gaping wound of capital outflows, S&P re-iterated its downgrade threat overnight following India dismal PMI print and this appears to have pushed the Indian government to Plan D. Following the failure to halt outflows of Plan A (status quo and blame it on the Fed/Speculators), Plan B (well something is up so 'capital controls' [9] on FX and tariffs on gold [10]), Plan C (that's not working so let's confiscate people's gold [11]), the Indian government is trial-ballooning Plan D - ditch the USD for trade-payments (especially oil which is up 50% in INR terms in 4 months).
Just when you thought it was safe to dip your fast-money toe back into Emerging markets...
Last night's INR collapse was dramatic to say the least as was the stock market's 3.8% collapse...
[12]
and 1-month forwards are pointing to things getting a lot worse before they get better as the divergence grows... 1-month INR forwards are trading at 69 - their highest (weakest INR) ever
[13]
Via WSJ, [14]
India is exploring possibilities of a rupee-based trade-payment mechanism with several countries, Foreign Minister Salman Khurshid said Tuesday, a move that may help stabilize the local currency and reduce the country's current-account deficit.
India already has a rupee-based payment mechanism with Iran, which was worked out by New Delhi and Tehran to skirt Western sanctions against Iran. Under that, Iranian oil would be purchased with Indian rupees, which Iran would use to buy Indian goods, which include food, drugs, consumer products and auto parts.
India imports more than three-fourths of the crude oil it requires and a depreciating rupee has increased its energy costs in the local currency, adding to the government's fuel subsidies.
[the Rupee price of a barrel of Brent crude has spiked over 50% on th last four months]
[15]
...
"Our commerce [trade] minister is in touch with many countries. Let's see where it is possible," Mr. Khurshid told reporters here. "If it is possible, than it would be of help to us right now," he added.
...
Trade Minister Anand Sharma last month said his ministry was exploring a rupee-trade mechanism with Iraq, the country's second-largest supplier of crude, behind Saudi Arabia.
