Standard Chartered Bank's Samiran Chakrabarty, in his analysis of the rupee on CNBC-TV18, explains that the effect of the ECB, additional flow of funds and stable oil prices on the rupee will not be immediate, but will come into play in the medium-to-long term.
Below is an edited transcript of the analysis on CNBC-TV18. Also watch the accompanying video.
Q: The three key elements seem to be the ECB, extra government securities of USD 5 billion and the tweaking of the time-limit or the lock-in. Do you think the three of them will add up to something?
A: From the perspective of the Indian Rupee (INR) market, this should bring in some amount of flows which should have a positive effect on the BoP (balance of payments).
But the market is disappointed that despite the brouhaha about a big package, little was actually delivered. This creates an impression that the RBI is comfortable with a relatively depreciating rupee rather than initiating action to make it appreciate.
If that message is transmitted, the rupee could depreciate further even with near-term measures. Let's accept that all these measures including the extra dollar flows are going to take some time to come through. So, in the near term this could be negative for rupee, but over the medium-to-long term, this could bring in some flows which could be positive.
Q: Your comments on both the division of the USD 10 billion between the two and the one-year maturity profile for infra products?
A: The addition of USD 7 billion released from a higher lock-in period to a lower lock in period in the next auction could invite interest into the segment and that could be rupee positive.
With rapid depreciation in the rupee, FIIs are to enter in a much-more hedged manner and that could mean the impact on the spot will be lower. So we will have to keep our fingers crossed to see the impact of these flows.
Q: How do you see the rupee move from here because there is not too much of a relief rally? Do you expect it to stabilise around these levels? Do you expect to see more relief in the course of time?
A: Relative to expectations, there has been disappointment and that’s why the rupee has depreciated in a knee-jerk reaction. As the market processes this information, traders will figure out that possibly USD 10-20 billion of additional flows might come in on the back of these measures.
This will result in the appreciation of the rupee as well. If oil stays stable, the current account deficit problem becomes that much smaller with these additional capital flows.
So altogether, the balance of payments might turn positive and that could bring rupee up. But all this will take at least a month's time and is not immediate.
Q: Do you think this withholding of tax business is restrictive for both money coming into the additional USD 5 billion Gilt limit and also the infrastructure fund which has been enabled?
A: From the G-sec portion, we can still get the money even with the inherent withholding tax. The infrastructure fund is where the challenge lies.
Q: What movement do you expect to see on the dollar-rupee right now?
A: If you look at the Exchange Earner's Foreign Currency (EEFC) measures, the quantum that was involved was just about USD 3 billion. Compared to this, the quantum is much larger and the impact should be felt. It is a question of timing.
At this moment, the market is frustrated about the measures not being large enough and is reacting negatively. But if these measures start bringing in dollars over a period of time or the market at least anticipates more dollar-inflows on the back of this, then this depreciating move could correct.