Sep 24, 2013, 03.46 PM | Source: CNBC-TV18

Rupee still undervalued;see Rajan as inflation hawk: Kamath

In the context of the rupee, if we started on the premise that the rupee is undervalued, we need to work out what we can do to get it to its right value, says KV Kamath.

KV Kamath, non-executive chairman, ICICI Bank while giving his take on the economic situation and Raghuram Rajan, says the new RBI governor besides being market friendly is going to be an inflation hawk. “Preventing the harm inflation could do the mass of Indian people is what that seat (governor) is supposed to do,” he says.

Kamath is the man who was single handedly responsible for creating India's largest private sector bank and a banker who has seen several business cycles.

Kamath feels the rupee is clearly undervalued today. The factors affecting the rupee could not just be demand and supply, especially considering its rapid movements of 3-4-5 percent in day or two. It could either be fear or outside factors that are playing on the rupee or it could be vulnerability.

Also read: Inflation can't be fought with textbook approaches, says Kamath

Below is the verbatim transcript of his interview on CNBC-TV18

Q: This Indianomics may well be Rajanomics because we have this new governor with brave new ideas bang on the first day of his getting appointed? What are your first thoughts on Rajan’s first moves?

A: I think it is in a way a textbook Rajan. If you look at over the past few years, what he has said about India when he has worked on Indian issues, he has got a very strong market’s approach to the whole thing. I think his time in Delhi has in a way seasoned him in the Indian context. I think it is a marriage of these two that I would expect him to bring to this role.

Q: Since you spoke about markets, that whiff comes out in his financial sector reforms report and you knew him well when he worked on that report, what could be the main tenets of Rajanomics if I put it that way?

A: I was about to say that. Everyone of us needs to go back and read that report because that brings out his approach to how India should progress in a financial context and in that report there was a whole lot of freeing up that he was talking about and which I think the committee members endorse at that point in time. I would see that large part of that should happen now that he is in the seat. Of course tempered with his experience in Delhi because that will be invaluable to him in his job.

Q: The report also gives an idea that the Reserve Bank of India (RBI) will have to be an inflation watcher - in fact it says it should not have any other goal. The report says RBI should go after inflation, so do you expect besides being market friendly he may also be inflation hawk?

A: Indeed he would be because this is a consistent policy that you have heard from the governors of the RBI that we are a nation of a billion plus people and so, preventing the harm it could do this mass of people is what that seat is supposed to do. So I am sure that that will be a paramount in his mind.

Q: Let me come to the rupee's performance itself like someone was pointing out the rupee has jumped 6 percent since the new governor but the real (Brazilan currency) has also jumped 8 percent, the whole context has become a little riskprone globally. However, do you think that India still remains vulnerable that probably this risk appetite could very quickly be reversed with risk aversion?

A: From my perspective we need to understand what really is the issue with the rupee - Is it a true demand and supply issue?To me it is not as yet a demand and supply issue which is playing out in the way that we see movements, which are 3-4-5 percent in a day or two days. This doesn't happen with demand and supply.

This is either fear or outside factors which are playing on the rupee or vulnerability and I guess that there is a whole lot of speculation an environment of speculation around the rupee which has pushed the rupee to a level which truly it should not be at. So rupee is clearly undervalued today.

I am sure that watchers will very carefully see what happens in this speculative environment around the rupee and what is it that the policymakers could do to spook it back as it were because at every turn, the rupee seems to be spooked or it was spooked.

I will not go into the real (Brazilian currency) issue but I think in the context of the rupee, if we started on the premise that the rupee is undervalued, we need to work out what we can do to get it to its right value.

Q: One way of looking at the positive events on the rupee is that - that is a ‘Crocin’, which Rajan has administered, it has taken-off this fear and vulnerability probably but there are fundamental problems of a higher fiscal deficit problems of a current account deficit (CAD) - so do you think that unless the government delivers on diametrically cutting the fiscal deficit a dramatic diesel price hike we could still be in troubled waters?

A: Why would I doubt that the fiscal deficit would to where the finance minister has set it, for this year because he has delivered on everything that he has said. Therefore,  I start with believing that the number will happen and if that number happens then we get into a root and cause situation because is the rupee where it is - a cause or is it a root of our problem. We will need to work that out.

A whole lot also depends on policy making and the stance they take. The policymakers taking small step, maybe big step as they go along, and articulating that indeed we have tools could be what is required to fight these extra large doses of speculations that we have in the market.

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