Sep 05, 2013, 10.28 AM IST | Source: CNBC-TV18

UBS sees only near-term stability in rupee on Rajan's steps

UBS is not very upbeat on the rupee's stability after the slew of measures introduced immediately by Raghuram Rajan after taking over as the RBI Governor on Wednesday.

Bhanu Baweja

MD & Global Head of EM Fixed Income, FX research

Expertise : Equity - Fundamental

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Immediately after taking over as the Governor of the Reserve Bank (RBI), Raghuram Rajan introduced a slew of measures which raised hopes of support for the battered rupee.

However, Bhanu Baweja, head of research and EM strategy at UBS, feels that Rajan may not be able to put a ceiling on the currency's fall. The overshooting rupee may see some stability in the near-term and reduce the panic in the market, but may falter again on strong US jobs data, he told CNBC-TV18. 

On the market’s expectations of slashing interest rates, he believes the governor may not do it and wait for the FOMC’s actions on September 17-18. Also, current account deficit (CAD) needs to be balanced which can happen only by having a reduction in domestic demand, Baweja adds.   

Also read: Raghuram hits first-ball sixer; looks set to bowl mkts over

Below is the edited transcript of his interview to CNBC-TV18

Q: Do you think there is a scope for a ceiling to put for the rupee? Are we going to get 66-65/USD very quickly?

A: When we speak about Dr Rajan, we could not have got someone with better pedigree. He understands all the issues. He knows the right thing to do and how to act on these issues.

I hate to be a party pooper, but I will say this nonetheless; monetary policy communication is not India’s biggest problem. Monetary policy is also not India’s biggest problem. You can get the best guy to come and try and fix it.

The policy that the Reserve Bank of India (RBI) followed before this was the right one. Their communications wasn’t perfect but the monetary policy was correct. I don’t think he is in a position to fix all the issues. Therefore, will he be able to cap dollar/INR? No. I don’t think so. 

Tomorrow you have the non-farm payrolls report from the US and if the numbers are very strong and US treasury is begun to sell off again. India is again in a bad shape. The entire point is that India is not in control of its destiny.

So this is important for sentiment when the rupee is moving Rs 2 against the dollar every day because of bad sentiment. This helps, but this is not a solution and my biggest fear is that the market expects him to come in and ease interest rates. He is not going to do that. In fact, one of the reasons he has postponed the RBI meeting is because he wants to see what the Fed does first and take it from there.

So he understands better than anyone else that India needs higher real interest rates. India needs to move away from physical savings in gold towards financial savings and that requires higher interest rates.

Q: If we go full tilt to make current account deficit (CAD) a current account balance, which we may have to as we don't have money; can the impact on the Gross domestic product (GDP) be terrible?

A: Yes. There are two ways to improve your CAD, one is the receipt side and one is the payment side. The receipt side is not in your hands; depends on whether the US and Europe improves. The good news is they are improving at the margin. Both US and Europe are throwing up a better data.

In case of Europe, this is a mini-up cycle in a structural downtrend quite simply because Europe hasn’t deleveraged at all. There is no balance sheet in Europe that can structurally expand which means that your export growth can go from 11 percent to 15 percent, but exports are not going to bail you out and take CAD down.

Q: If the governor is able to buy some time in terms of currency stability, will that at least stop this panic selling in the markets? Would that change the sentiment of Foreign Institutional Investors (FIIs) at all?

A: I think it might. Rupee has been sold extremely aggressively on very little volume which is a classic overshoot. For the short-term, Rajan’s joining is god sent as you need to get stability back in this market and a near-term appreciation in the currency can be seen.

FIIs however have not sold much, since July of last year you still have about USD 30 billion in. That is a lot of money, out of which only USD 5 billion has gone out. We haven't seen very aggressive selling at all. The market is moving quite a lot on very little volumes. So, stability is needed right now. If you had a few more days of this the market could properly crack. So this comes at the right time.

For the first time, everyone is bearish globally and locally; sounds like the perfect time to buy. The problem is everyone is bearish in their head not on their book. FIIs are long and I don't think the domestics will give the FIIs an elegant exit.

The sectors which are doing well; some of the deep cyclicals which are trading at liquidation value have been reasonably stable over the last few sessions.

It is the big defensive or pharma or IT stocks that most of foreigners are in that are going through pressure and they are going through pressure in very thin volumes.

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