The numerous measures taken by the central bank and the government in rescuing the rupee and lowering gold imports will help strengthening the country’s weak macros, says Devendra Kumar Pant, chief economist, India Ratings.
"The reforms have helped change the sentiment about Indian economy. By end-August, the Indian rupee was the worst performing currency among the emerging markets (EMs) and between end-August till September 13, it is one of the best performing currency among EMs," adds Pant who has a FY14-end target of 59-61 against the US Dollar.
Pant additionally expects a better rural demand renew the manufacturing sector demand or industrial sector demand.
Below is the edited transcript of Pant's interview to CNBC-TV18.
Q: What have you factored in for the rupee appreciation, the range that I alluded to and by when do you expect it to take place if that is the case?
A: Rather than taking an intraday call or day-to-day basis call, we have taken a call for fiscal end which is as on end March 2014. Our view is that by end of March 2014, the rupee could appreciate from the current levels to a range of 59/USD to 61/USD.
What will lead to this appreciation is our expectation that the Q2 economic growth will not be very much different from we have witnessed in Q1. However, with good rainfall, and the kharif crops coming in market from the Q3, the rural demand will increase and that will renew the manufacturing sector demand or industrial sector demand.
There are certain steps which have been taken by the government, more on the reform side, although they will not result in immediate foreign direct investment inflows or capital inflows in the economy or the stable capital flows.
The reforms have helped change the sentiment about Indian economy. By end-August, the Indian rupee was the worst performing currency among the emerging markets (EMs) and between end-August till September 13, it is one of the best performing currency among EMs.
If one looks at what is happening on the trade side, the July and August trade numbers have been good. They are not comparable as what we have seen between FY04 and FY09 but they are certainly much better than what we have been witnessing in the last one-and-a-half and two years. If we look at what is happening to the US economy, it is a slow growth but it is expanding at a rate of 1.5-2 percent per annum.
The euro zone is out of recession although the growth is 0.3 percent in the second quarter. Japan too is performing well. China is performing relatively better than what they have been expected to do. All in all, these things put together the steps which have been taken to curb gold imports, all of these will lead us to relatively better macro economic fundamentals. This will help in some improvement in the saving and which will translates into the lower current account and the currency will appreciate to the level at 59/USD-61/USD.
Q: The other problem has been that this has been a bit of an emerging market phenomenon and global factors have led to this kind of outflows over the last three months and in the last one month some of the money has come back. What is the guarantee that in the second half we won’t have any kind of accident again in global markets and in that case maybe a possibility of USD 5-6 billion of outflow cannot be ruled out?
A: Whenever anybody is building a scenario or making a forecast, it is based on certain set of agencies. The worst kind of crisis for the EMs basically on the currency side this year was Fed tapering and everybody assumed that the USD 85 billion worth of bond buying or the quantitative easing will become zero in a day but as things unfolded, people are talking about USD 10-15 billion a month will be reduced instead of USD 85 billion worth of quantitative easing. The quantitative easing will come down somewhere around USD 70-75 billion.
What happened to the currency in August was nothing but a speculative attack on Indian currency and if you talk to the people, those who are in this market, the volatility was very high and even the small orders of USD 1-2 million on the currency trade was difficult to execute. So, the currency weakened because of fundamentals and the decline or the depreciation was sharp or very fast because of the speculative attack.
Some of the measures which have taken will reduce some of this speculation on it but if something happens, something unfolds in the global economy being part of globalised economy that will have an impact on Indian economy.