According to Sanjay Mathur, the head of research and strategy at Royal Bank of Scotland, the rupee needs policy response from the government and not administrative controls or intervention from the Reserve Bank.
“We need to see a response on the policy framework coming out of Delhi and not out of the Central Bank,” he told CNBC-TV18.
The rupee sliced through the 56 per dollar mark today, despite the central bank’s numerous attempts at curbing the volatility. The greenback has lost over 24% since its high in April last year, and more than 13% in 2012 itself.
According to Mathur, a millennium bond issue by the government will help the rupee quickly recover and replenish the RBI’s reserves. “On the other hand, we will see growth come down to a point where import completely collapses,” he added.
With this view, Mathur sees the rupee moving to 57-58 per dollar levels.
Below is an edited transcript of his interview with Gautam Broker and Ekta Batra. Also watch the accompanying video.
Q: Do you think that the RBI is now going to move more aggressively with the rupee?
A: I think the RBI has moved fairly aggressively; we have seen that the intervention has clearly increased in the foreign exchange market and at the same time we have seen series of administrative measures that have come into play.
I think the real problem that we are facing right now is that there is so much of deflection in the terms of rhetoric we are seeing in Delhi towards external events etc, when the realty is that the risk premium of Indian assets has deteriorated. So medium-term stabilisation of the rupee depends upon a real policy response and not administrative controls or intervention. We can intervene as much as you want, but that has never worked beyond a particular period of time.
We also have to keep in background that growth is already very weak in the Indian economy. So is the intervention is really going to be effective if it pushes up rates?
Q: How much headroom does the RBI have to intervene and also will a direct dollar window for OMCs have a sweeping impact on the forex market or will that too be short lived?
A: Looking at the issue of oil prices, it is the point on how much more reserves does the RBI have. The stock of reserves is fairly high still despite the intervention we have seen. But what we have learnt is that even monthly intervention to the levels of USD 8 billion dollars has provided very temporary relief. Likewise, when you look at the oil purchases, it would take some pressure off the market in the short-term and we have done this in the mid 1990’s.
But there was a very critical difference between then and now. In those days, oil companies were big players in the foreign exchange markets. The market volumes were thin and the market was shallow. Now we have a much deeper market. Oil players are important, oil importers are important, but they do not have the same dominant position as they did in the mid 1990’s.
Given that the market is much bigger, it is a much more apt reflection of how the sentiments around the macro fundamentals in India are, so that makes the task doubly difficult.
Q: Now that we have breached 56 a dollar, what are the levels that we could work with? Are we just in a free fall scenario at this point?
A: It is very difficult to forecast rupee at this stage. I wouldn’t want to call it a free fall, but where the issue really lies is that we need to see a response on the policy framework coming out of Delhi and not out of the Central Bank.
So in that context, it becomes very difficult to forecast it. If we do have something like Indian millennium bond issue, then I think we could see the rupee stabilise pretty quickly, then RBI would be able to replenish most of its lost reserves. Or we will see growth come down to a point where import completely collapses. We have these two options, so my guess is we are still looking at 57-58 a dollar.