The government and the RBI failed to take appropriate steps at the right time to stem rupee fall, says Rajeev Malik, CLSA Asia-Pacific Markets. But rupee’s broader adjustment is not over yet, he says. He sees the currency heading to 70 per USD if policy mishaps, like passing of food bill, continue. The rupee has fallen to all-time low of 68.80 against dollar on Wednesday.
He pegs FY15 GDP target at 5.5 percent which is predicated on significant growth recovery. According to him, early polls may be a better trigger for growth revival as there will be more clarity in terms of political stability, which in turn may lead to better policy action.
With focus on growth, it might be a better bet to go in for stern policy action like a one-time diesel price hike. The under-recovery for oil marketing companies currently stands at Rs 1,40,000 crore against Rs 80,000 crore pegged for the full year.
Below is the verbatim transcript of Rajeev Malik's interview on CNBC-TV18
Q: At this one point in time you can clearly say, I told you so about the rupee, you are among the first to call the 65/USD level but where do you think the currency might stabilise at this point in time, we have just got one-day relief or so it seems, do you think 70/USD is going to come faster than even you believed?
A: I will not say, I told you so. It is one of those things that if policymakers had perhaps moved in a timely and adequate manner, a lot of this stress could have been mitigated to a significant degree. We still continue to be in a framework or series or patchworks and band-aids to try and fix or deal with unintended consequences.
The critical issue remains in terms of the broader macro stabilization that needs to proceed at several levels and we are seeing incremental moves at best at that. For example, rather than opening up a window of US dollar supply for the oil marketing companies (OMCs), the Reserve Bank of India (RBI) could have done something far more relevant and meaningful like a chunky increase in diesel prices etc.
We can all blame the political quagmire for that but at the end of the day, there comes a time when you keep kicking the can down the road, it becomes more and more difficult to keep juggling.
Q: What did you make of the recent measure where the RBI has launched the forex swap window for OMCs, how much do you think it could help reduce the dollar demand pressure?
A: To be fair, it is only postponing the underlying dollar impact and I think the typical thinking still seems to be that a lot of the stress that is coming through is going to be temporary, meaning that over the next couple of months or three months, it is going to subside.
Go back to mid-July when the initial interest rate defends by hiking short-term rates were put in place and while RBI did not say so, government officials very clearly tried to signal that this is going to be temporary. So the point is the broader liquidity tightening cycle globally is not temporary.
We can debate whether tapering is in September or a couple of months later but over the next two-three years, liquidity cycles globally are going to be tighter and India is a classic example of an emerging market (EM) beneficiary that enjoyed the combination of weak global growth and exceptionally easy liquidity. So as that reverses, some of those pressure points are going to come back.
Q: How do you see rates, is there any vague idea as to when this unnatural 10.25 MSF rate will be lowered and basically do you see repo rates being hiked, what would the 10-year yield for instance be in the next six months?
A: The whole issue with interest rate defense that has been put in place is the argument given for that was to lower rupee volatility and rupee volatility is higher today than it was back then. Ideally, that signal is being compromised simply because either they have indicated it is temporary or they have indicated that they don’t want to tighten further.
So you are trying to compromise your own defense altogether. Even if it is dismantled, either under political pressure or because they are saying things are improving, I find it hard to believe given the broader liquidity scenario globally and how rates are going to adjust globally that RBI can continue with that removal of defense forever.
So at some point, even if they remove it, they will have to seriously give a thought to changing their monetary policy signals that means the repo rate. This is where there is a critical difference between how some of the other main EM countries have proceeded and India has tried to do it in a convoluted manner.
Q: What will be the negative of all this in FY15 or rather calendar 2014, you are speaking of elevated rates, global cost of capital is going to be high and with rupee at current levels maybe it could shave off a little bit but if it is at current levels then it is expensive coal, it is expensive iron ore, expensive crude, how do you look at FY15, one call out in the market is 3.7 percent even for the current year, how are you looking at growth this year and more importantly in FY15?
A: I will not comment about other forecasts as such but some numbers arithmetically would look challenging given we are going to see the impact of a good monsoon but the critical issue which is perhaps part of the confusion itself in investors’ and analysts’ minds is while government keeps talking about being pro-growth and wanting to be pro-growth that approach in the process is compromising quite a lot of adjustment.
So we have that growth inflation debate. We have the growth interest rate debate. We have the growth rupee debate and in all this, while all the other defensives or corrective actions have been compromised, it is not as if growth has been salvaged. So, it is far more important that people understand the solution for growth turnaround in India is not with RBI, it is with government actions and to the extent that we keep ignoring that, growth is not going to be turning around very quickly.
So, FY15 for example, we still think there is scope for doing a 5.5 percent growth after a slightly under 5 percent for the current year. It is not as if suddenly the investment cycle in India will be off to the races, we will see what the election outcome is but at this point, there is some serious shot in the arm that the economy needs either in early election or a good election outcome or significant easing because inflation drops. Politically election is a better trigger than RBI being able to ease aggressively because that is not going to happen.
Q: The reason why many economists are frantically scaling down their GDP targets is because so many parallels are being drawn to the 1991 crisis where we had India and a balance of payments (BoP) crisis and where there was a need to ask for a credit line from the IMF, do you think the situation has become that severe?
A: No, I think it is important to understand for all the problems India has, this is not playing out the way 1991 necessarily played out and I tell you exactly why. Equally this is not what Asia went through in 1997. That doesn’t mean that the situation in India cannot worsen further. It certainly can. However, one very important differentiating factor is RBI’s own non-intervention approach towards the currency. Typical traditional BoP crisis in an EM is when Central Bank steps in, draws a line at an unrealistic currency level and soon they exhaust their reserves, don’t have anything, there is a speculative attack and they have to go to fund to sign up for a conditional rescue package.
For all the criticism RBI has got and for all miscommunication, allegations etc that are out there, this is one approach which has been a saving grace. It has not been without cost because rupee depreciation has been a lot more unnerving but we would be in a far more difficult problem much earlier if RBI had intervened and drawn a line and run down their reserves altogether. There are qualitative differences that should not be ignored, people just take off on a handle and there is a kitchen sinking happening.
Q: You said chunky diesel price hike is much needed at this point, how much do you think will solve the problem, Rs 3-5 per liter is being talked about but forget about what is politically feasible, realistically how much do you think we could eke out?
A: What they need to do is get rid of the full under-recovery, they cannot do it in one go, so you do let us say 50 percent in one go and you come up with an accelerated adjustment over a six-month period. People want to see that kind of a stern strong policy action. So the political mandarins have got their food security bill, will probably get the real estate bill as well those are the negatives. Can we get some positives for a change now?
Q: Where do you see the rupee now, do you think that 70/USD is still round the corner that we are doing some band-aid stuff and the one that came overnight was genuinely a sensible one, but still 70/USD is round the corner and cannot be avoided?
A: Rupee is both oversold and undervalued. That does not mean it necessarily needs to go to its theoretical fair value in a hurry. We will see a bit of a respite but at least a framework I have used for the last couple of years still stands given India’s high relative inflation, the fact that a lot of the corrective actions are going to take time and of course the global environment is going to be more hostile in terms of less easy liquidity, rupee’s broader adjustment is not over.
We will see some respite but we will cross 70/USD although not necessarily in a hurry unless globally things go back or we see more mishap as far as policymakers are concerned.