RBI's recent move to meet dollar demand of three oil companies through foreign exchange swaps is a rather significant measure, says Neeraj Gambhir, MD & CO-Head - Fixed Income at Nomura India. But going forward, the same old worries around dollar strength against the Indian rupee persists, he says.
Also Read: RBI to meet dollar demand via FX swaps
On the entire debate on currency depreciation helping exports, he says, there is another theory that says exports are a lot more impacted by the global growth phenomena rather than just currency per se.
He thinks if there are any improvements in data in terms of current account deficit (CAD), or a pullback in dollars rally against EM currencies, etc, then the rupee will first test the 65 against the dollar level, and if that breaks then from there towards 62-63/ USD.
The sharp depreciation in the rupee will create its own vicious cycle and that is worrying the market, Gambhir says. It is the pace, not the direction, he says.
Below is the verbatim transcript of Neeraj Gambhir's interview on CNBC-TV18
Q: Today of course there is a bit of a respite that you have seen on the currency though it has come off its opening highs, what is your sense, is there some more bad news to come for currency, is it still headed to 70/USD mark or do you think we have seen the worst of it?
A: It is hard to say that we have seen the worst of it. The RBI measure is a pretty significant measure, in that sense in my mind at best a temporary respite for now. It basically ensures that a lot of the dollar demand that was coming into the system from these oil companies especially since crude prices have also gone up is for the time being taken off the market and that is what the market is reacting to.
Looking forward, we still have the same old worries around the dollar strength against emerging market currencies going forward as well as crude prices as a result of these geopolitical tensions. These are the two key factors the markets are certainly going to watch out for. I don’t feel that the pressure on the rupee is going to go away in a hurry. Some of our fundamental macroeconomic problems have not been resolved as yet. So at best this pressure is a temporary respite in this market.
Q: There is some contrary opinion which is coming out from the economists community now that maybe we should allow the rupee to depreciate completely in FY14 and find its demand/supply scenario or demand/supply level and FY15 will then be better because we will possibly get more competitive on the export front, would you concur with such a view?
A: At the end of the day as far as the macroeconomic outlook is concerned, we all feel a lot better if the currency adjusts rather than we have to take some of the other measures like increasing the interest or introducing some kind of capital controls because at the end of the day, rupee is the price of foreign exchange and you need to have the price adjust rather than you need to adjust the demand and supply and hopefully with the adjustment of price, the demand and supply will automatically get impacted.
The problem is that too sharper depreciation in the rupee creates its own vicious cycle and that is something which worries the market. It is the pace, not the direction. I don’t think that you can reverse the direction of the currency in such a short period of time.
As far as the impact on growth is concerned over the future years, it is assumed that as the currency depreciates, the country gets a lot more competitive and hopefully it helps us to grow our exports. There is a serious question mark around what is the impact of currency depreciation on export competitiveness and are the exports so much sensitive to the currency as they are to global growth. There is a feeling that the exports are a lot more impacted by global growth phenomena rather than just a currency per se. But it does bring in a lot of competitiveness in the economy.
Q: The Fed has made it clear that the emerging economies now have to prepare themselves for tapering and the US will do what it has to do for its own good, come September we will have maybe the first round of tapering, you think all that is factored in or once the tapering starts, we might see some more damage in equities, currencies and flows and that would have some more incremental impact on the currency?
A: The exact amount of tapering is not yet known though the calendar is broadly there in everybody’s mind that this entire stimulus has to finish by the middle of 2014. There could be some debate about what is the exact amount whether it is USD 15 billion or whether it is USD 10 billion, but at the end of the day that tapering has to happen whether it starts in September or in December.
So markets have moved quite a lot ahead of that and it has been a serious adjustment that the markets have gone through. So I am hoping that once the actual event happens, probably we will see some kind of a respite rally. Having said that, the entire tapering and withdrawal of stimulus in the United States is not just a one day or one week or a one month affair, it is a much more longer affair.
If the US economy continues to perform well then certainly we will see Federal Reserve withdraw the stimulus from the market and we will need to see what adjustment the market needs to go through to allow for that withdrawal of stimulus. What we have seen is the first phase of that entire event but this event is going to have many episodes to it and I cannot say that we have completely done with the full adjustment that market requires to go through.