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Apr 25, 2012, 11.54 AM IST
Ananth Narayan, MD, global markets & co-head of wholesale banking, South Asia, Standard Chartered Bank says there are many headwinds for the rupee to deal with right now, especially, India’s spiraling current deficit which is leaving many foreign investors nervous.
The rupee is at 52.70/71 to the dollar, marginally higher from Tuesday's close of 52.68, with traders expecting some profit-taking after a 3.45% rise this month.
Ananth Narayan, the managing director, global markets & co-head of wholesale banking, South Asia, Standard Chartered Bank says there are many headwinds for the rupee to deal with right now, especially, India’s spiraling current deficit which is leaving many foreign investors nervous.
The reflection that you see is a weak sentiment-led rupee, says Narayan to CNBC-TV18. “The only positive is there is so much of all pervasive negativity, so perhaps you are close to the peak when it comes to the dollar-rupee.”
Below is an edited transcript of his interview. Watch the accompanying video for more.
Q: There were some comments this morning indicating that there were fund outflows which may have put more pressure on the currency market. In the near-term, is there something you are seeing that’s causing pressure for the rupee?
A: Clearly, the sentiment for the rupee remains negative across a whole host of areas. The fact that our trade deficit has been such a high number for the last year and the trend seems to continue and the fact that growth no longer seems to be the main theme for the India story, is questioning a lot of the FII and the FDI flows that are there on the back of everybody’s mind.
The reflection that you see is a weak sentiment-led rupee. People are talking about bigger highs on dollar-rupee going forward as well. The only positive that we have for the rupee is there is so much of all pervasive negativity, so perhaps you are close to the peak when it comes to the dollar-rupee.
Q: At what point do you see the Reserve Bank getting active?
A: I am sure they are active 24x7 but, yes, one critical level that we actually settled after December 15 is steps taken by the RBI in this range of 53-53.40. If you remember, the dollar-rupee moved in that range for a long time. If that range was to break and we start to test 54 again then you can expect the RBI to start taking strong notice.
I guess we sometimes tend to forget that the RBI still has immense abilities to manage the dollar-rupee in the short-run and to the medium-run. It still has a large amount of reserves in play and it has regulatory capabilities. It can regulate the market the way it wants. So, yes if we do test 54 again, which a lot of market participants don’t rule out, we could see the RBI take the next steps maybe in conjunction with the ministry. We could maybe see restrictions on gold imports. We could see maybe talk of an IMD or RIB kind of dollar borrowing all over again all of that could come into play.
Q: Would that help in the medium-term because we have seen one degree of regulatory intervention a few months back that pulled it back to 49, but only temporarily. Are we back to where we started or nearly?
A: Absolutely. The fact remains that the ability of the RBI and the ministry to manage the rupee in the short-run and medium-run is not in doubt. The question is the time that they purchase by way of their actions is that it is used to settle the basic issues and the structural issues in the Balance of Payments (BoP) and it goes back to growth. The fact is we as a country need to focus back on growth.
The last two quarters of 2011 have seen negative fix capital formation which is a shocker. We need projects taking off. We need investments in infrastructure going through. Hopefully, this credit policy which has gone by and positive reflection on GAAR coming through the first week of May etc can change the sentiment a bit. Once we have growth coming back on the anvil that’s when possibly we can see some stability come back on the BoP.
Q: When you speak to institutional players, are you getting the feeling that India is kind of lower on the rating amongst others. In defense a lot of people say all emerging market currencies and Asian currencies are going through this, but we have had it worse?
A: Yes, India has been singled out for the wrong kind of attention in the last few weeks and months. Again, it goes back to that old story of lack of projects taking off and questions about policy regarding infrastructure growth etc. The only positive is that perhaps this negativity is all pervasive now. This negativity and this market always tends to over react.
So when we are at 54, we call for 60, when it’s at 49, we call for 45. So maybe we are at the last legs of negativity, having said that those legs are still there. We could see some movement again up on the dollar-rupee. One more set of steps from the RBI maybe, but then hopefully sanity will prevail again.
Q: Is the 10-year benchmark yield folding into a bit of a range around 8.5% now or do you see any sharp moves anytime in the next month or so?
A: It’s caught between relentless supply and the policy actions from the RBI including OMOs and CRR cuts. So every time we go into 8.70-8.75% kind of a range, the RBI comes out with an OMO and maybe liquidity injection methods that help the market.
When it comes to 8.35%, suddenly the market sort of catches up with reality with the fact that we have auctions week after week. So yes, you are right it is caught in a range between a rock and a hard place of supply and OMOs and it looks a little difficult to break that range of 8.35-8.75%.
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