The Reserve Bank of India is unlikely to ease rates in its upcoming credit policy, says Indranil Sengupta, chief economist-India, Bank of America Merrill Lynch.
Speaking to CNBC-TV18, Sengupta says until the Fed takes a call on tapering its bond buying program and until the RBI itself sees the results of its rupee-dollar swap scheme, it will not ease any rates.
Additionally, Sengupta says that the Indian currency, that has been hammered severely in the past few days, is undervalued by 30-40 percent.
"But the move by the new RBI Governor, Raghuram Rajan to raise forex reserves is most welcome. If the RBI continues to address the core of the problem which is falling forex reserves then they will be able to anchor rupee expectations," he adds.
Below is the edited transcript of Sengupta's interview to CNBC-TV18.
Q: What do you think will the new governor do on its first policy meet? Will he reverse some of the tightening measures something that you have written about in your policy note as well this morning?
A: We think there will be status quo unless the Fed defers tapering. We think that the Reserve Bank of India (RBI) will want to watch the results of the swap scheme that they have announced which ends on November 30, before making their next move.
Q: Just wanted to focus on the rupee – do you think that the worst is now possibly over for the rupee or do you think we could possibly test that 68.8 mark again?
A: In a volatile market one can see that the rupee is almost 30-40 percent under valued at this point in time but the move by the new RBI Governor Raghuram Rajan to raise forex reserves is most welcome. If the RBI continues to address the core of the problem which is falling forex reserves then they will be able to anchor rupee expectations.
Q: Just want to tie that in with the trade deficit number which is expected next week. If in case there is a better trade deficit number for August that does come in which is sub-USD 10 billion do you think then there would be additional amount of stability that would come in to the currency market and that is possibly the need of the hour at this point?
A: I think the current account deficit (CAD) has peaked. We had exceptionally high gold imports in some months, so we may get exceptionally low gold imports in another set of months. But the current account deficit is peaked. So, that is good news.
The need of the hour is for the RBI to demonstrate that they can raise more forex reserves. Now whether it is because the current account deficit is peaked, or because they are getting schemes like non resident Indian (NRI) deposit scheme to comfort the market and communicate that if need be the RBI can stand behind the rupee the way it used to earlier, the way it used to do in 3-4-5 years earlier.
Q: But the problem is about the financing of the current account deficit right now because last year was not a problem, this year the flows haven’t been there to support the markets or to support this deficit especially in the last 2-3 months. How big a concern will that be?
A: One needs to do these NRI deposits scheme maybe if this succeeds one can look at. There is also a quasi-sovereign bond issuance that will happen. Maybe if these two succeed the RBI can look at a sovereign bond issuance. The focus of the RBI has to be to raise forex reverses. The way it was always the case till 4-5 years ago when RBI always focused on raising forex reserves to provide confidence to the investor.
Q: What is your call on the rupee? Has the currency turned a corner – have you made a bit of a bottom at around 68-69 or do you think that is that can be over shoot as well if indeed there is start of a tapering?
A: A lot will depend on the quantum and degree of tapering. If the tapering is at the market expected rate of around USD 10 billion, then there may actually be a relief rally but we have to see how that goes.
Q: You did speak about this September 20 policy but if you could elaborate what your expectations from the RBI would be on rates even going into the rest of the year?
A: The July 15 measures will persists atleast till the middle of December because the RBI by then wouldn’t get clarity on how much money they have raised in this swap facility for Foreign Currency non-resident (FCNR) deposits till then. So, we expect this 10.25 to remain till middle of December. After that, if the rupee stabilizes, then we are still looking at a 50 basis point repo rate cut because we think that growth is going to disappoint on the downside and at some stage, if the RBI is able to recoup forex reserves they can then turn to protecting growth.
Q: What is your expectation on growth then?
A: We are looking at 4.6 percent this year and 5.5 percent next year