Rupee could go to even 58 against the dollar: Sanju Verma

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Sanju Verma of Violet Arch Capital Advisors spoke to CNBC-TV18 on her outlook to the market today. 

Below is the edited transcript of the interview. Also watch the accompanying videos.

Q: It's not been a good ride these last few days but let me ask you about the rupee where there is mayhem this morning at 54.20 against the dollar. How much of a worry for companies is it turning out to be and the market?

A: I am not surprised that it is at Rs 54 plus today because yesterday in the non-deliverable forward market, there were clear signals that if anything, rupee could actually weaken all the way to Rs 55 in the immediate term and may be even Rs 58 going forward in the next couple of weeks. That would have seemed alarmist even three months back but that does not sound alarmist any more.

I have been speaking to some foreign bankers who have a pretty good pulse on these things, and the general sense they get is the fact that the RBI clearly does not want to throw good money after bad.

When we last spoke about a month back, I had told you that the RBI should intervene strongly and sharply. I stand corrected, I did not realize at that point in time that in the month of September alone, RBI had intervened and bought dollars in the spot market to the tune of USD 800 million. Now there is data out in the market which suggests that on two days in November alone, November 23 and 24, RBI pumped in close to USD 3.5-4 billion. But that barely helped the rupee. If anything, we have seen it depreciate 20% calendar year-to-date.

What that tells you is that the RBI's ability to intervene even if it wanted to be more aggressive in doing so is pretty much limited with forex reserves at USD 300 billion. I think while we can pat ourselves on the back and say that is good enough to cover 9-10 months of imports, the point that everybody seems to be missing is that out of this USD 300 billion of forex reserves, USD 88 billion is extremely short-term commercial debt.

Given that the rupee has been playing spoil sport with market sentiment and how, I clearly believe that the worst is not over as yet for the simple reason that you have 30% of the total forex reserves which is coming up for redemption in the next one year or even lower than that, is not likely to be rolled over. That clearly shows that if you are expecting any kind of respite from the exchange rate perspective, you will be clearly disappointed.

Q: What's your call, we are not very far away from the 52-week lows, so it's going to be a bad year, but how do you see it from here?

A: If I have to go by the derivative indicators, my technical chartist told me that everything seems to be in a bearish phase. The Dow Jones has even started outperforming the Nifty, they are not even talking of the S&P 500, the CRB index is down and most importantly in the last two days, the December futures have added two million shares by way of open interest and that in a down trending market clearly shows that shorts are building up very aggressively. The other very interesting point is that at most strikes, when the call options are losing out on the implied volatility front, the implied volatility for put options at various strikes is actually going up. It has gone up all the way to 30 levels at the 4800 Put, which basically tells you that put option buyers are expecting the Nifty to decline. Were the Nifty to decline sustainably over 4800, then I think put writers are going to unwind positions very aggressively and a fall from 4700. If that is sustainable, then we could fall another 300-400 points on the Nifty very sharply.

But like I said, that is a derivative and technical view point. I really don't think the picture is as gloomy as it is being made out to be. I would try and look at the rosier side from a fundamental perspective and there is clearly an adversity in opportunity given the fact that the best case scenario now is that the eurozone will have a GDP growth which is negative to the tune of 1% going forward. The worst case scenario is that if the recession in the eurozone intensifies, then the eurozone could actually in the calendar year 2012, as per the IMF report, see a negative growth of between 3-4%.

Now if the euro zone were to grow 3-4% negatively, the IMF says most of Asia -Thailand, Indonesia, Taiwan, Singapore whatever- all these countries will also see negative GDP growth to the tune of 1-2% or more. The only two economies which will be insulated will be China and India. So there is a silver lining in that.

While we can feel absolutely disappointed with the fact that we clocked in 6.9% GDP for the September quarter and mind you, that number is likely to be revised downwards given that export growth in September quarter was 27%, and now we are told that the export number itself needs to be revised downwards to the tune of USD 9 billion. So that 6.9% growth which we saw for September quarter could well be revised downwards to 6.3-6.5%.

The point I am trying to make is if the eurozone where to grow negatively in a worst case scenario to the tune of 4%, if the rest of Asia ex-China were to grow negatively to the tune of 1-2% because of this huge linkage with euro zone, and if we, in a worst case scenario, assuming that manufacturing growth is 3.5-4%, agricultural growth is 3-3.2% and services continues to just hold up the baton at 9%, we will still do 6.5 -6.7% GDP growth. So in absolute terms, historically speaking, we are well below the 8.6% we clocked last year, but in a relative sense, we are far better off than everybody around us. That would be one reason to pat ourselves on the back; otherwise there is nothing flattering about the scenario as it is panning out now with respect to various parameters, be it capital goods, consumer durables or consumer non-durables.

Q: What's your take away from what you heard from New Delhi over the last one week and what is that doing to the market?

A: If it's the credit policy that you are talking of, I think this whole debate about growth versus inflation is now passé. It's been done to death and there is fatigue there, at least as I see it after talking to investors across various time zones. My sense is the debate which the RBI should now be internally having is domestic price stability versus exchange rate stability because at the end of the day, with interest rate hikes you might be able to control a demand-pull inflation to sum extent, but our was never a demand-pull inflation to start with. Unfortunately, because of the successive rate hikes, demand may have gotten curtailed to some extent, but what it has finally led to is humongous cost push inflation.

Look at the September quarter numbers, they tell you a story which is very clear. The topline growth from most companies in the BSE 100 is still 20-25% plus, but look at the operating profit growth... that is barely there and at a net level if you exclude the banking sector, then the BSE 100 has actually seen a net profit de-growth of 25-30%. That tells you that companies have not been able to pass on price hikes or input cost inflation and they are taking the hit on the chin and how!

So my sense is that that clearly is the big story which has to play itself out. What higher toplines but lower profits have meant is very poor tax collections. Net of refunds from the direct tax collections is barely 6-7% and last month, even the excise collections fell by 6% or more.

So my sense is the RBI may have beaten off more than it can chew. It has become so enthusiastic in trying to control inflation that it has perhaps lost site of the biggest take away from the euro crisis. A fiscal deficit can be controlled, a budget deficit can be controlled, but what you cannot control is a current account deficit scenario and that's the big lesson from Spain, Italy and Ireland. Italy has a primary surplus. When Spain and Ireland went into crisis, they actually had a balanced budget or a marginal surplus on their budget. But what is common to all these countries and it is a fact that the current account deficit simply blew out of hand and by the time they decided to deal with it, it was too late. Current account deficit at 4-4.5% for these economies was something that they could simply not curtail.

So in my conscience, the RBI will have to take a call, do we want to only focus on domestic price stability or do we want to look at exchange rate stability and ensure that in our bid to control demand, pull inflation locally, we do not induce a fiscal deficit-induced inflation which is what is happening right now.

As I see it at my end, there is bit of hope, there is more of despair. That despair will turn into hope provided there is a rate cut tomorrow. I don't think we even need to debate about a CRR cut or the fact that RBI buying OMOs, so there is no need now for a reversal of policy stance. I think the message clearly is that the repo is a benchmark for 10 year G-Secs. That means that if the repo is 8.5%, give or take a little bit, the 10-year yield will not fall to 8.1% or 8.2%. You can see it hovering in the region of 8.4% to 8.5% which means the cost of funds for corporate is still going to be 11-12% or more, and that has to come down. For that a clear rehearsal is necessary because April to November, in absolute terms, the incremental non-food credit has just been Rs 2.5 lakh crore. We need to do Rs 4.5 lakh crore between December and March if we have to come anywhere close to achieving the RBI stated objective of 18% credit growth which was encapsulated at the start of the fiscal year. I don't see that happening if we continue with the repo of 8.5%.

What inflation are we talking off? Serially adjusted manufacturing inflation is less than 4% between April and now. I think biggest indicator of that is there is a huge slowdown is M1, people no longer look at M3 number. M1, which have historically averaged at 16-17% today, has fallen to an abysmal 1.9% in the month of December. And if M1 was any indication of rough times ahead with respect to liquidity crunch, then I think the RBI should act now. We harp on the fact that monetary transmission has a lag effect to it. So if there is a lag theory that you believe in, then maybe, a rate cut should come tomorrow so that the lag can work itself out and at least FY13 will not be a lost year like FY12.