Measures to be more significant for better impact: Experts

Siddhartha Sanyal, chief India economist, Barclays and Jamal Mecklai
CEO, Mecklai Financial Services discuss on CNBC-TV18 that for better impact, measures by the government and the RBI had to be significant and considerable.

Below is an edited transcript of the interview. Also watch the accompanying video.

Q: But do you believe the measures announced will be able to turn sentiment around? How material are the changes on a short-to-medium term perspective?

Sanyal: There has been mismatch in terms of expectation and reality. Some of them were expected but much later during the year and as such these measures are positive for the rupee.

Q: We saw the rupee fall as soon as the announcements were made. Do you believe there is perhaps some hope of relief once the news is absorbed?

Mecklai: I think the news was very disappointing. With the finance minister leaving on great expectations, the government infuses a measly USD 5-10 billion. The rupee today is a combination of overseas dollar strength and the cost of negative sentiment.

My estimate is that of the Rs 56-57, about Rs 5 is the cost of negative sentiment. Of that, about Rs 3 is because of global uncertainty and Rs 2-2.50 is a result of foolishness in taxation.

So unless the dollar strengthens dramatically overseas, I don’t think the rupee is going to weaken anymore. The rupee is at one of the worst stages it can be.

Q: But of the slew of changes that have been made to FII limits, ECB limits and the lock-in period, what would you think is the most material?

Mecklai: Fundamentally, opening the taps as wide as you can is a good idea, but for it to be meaningful, it has to be significant. The RBI needs to, in my view, offer USD 50 billion to the debt window that will set off some movement in the rupee. I just don’t understand why the RBI is taking these penny ante measures.

It’s marginal and ultimately the value of currency is supply and demand. You’ve to just open the window as wide as possible, pray that the dollar doesn’t strengthen anymore and get the government to implement a few initiatives. I think really the RBI’s hands are limited in what it can achieve.

Q: One of the big disappointments today was when the government said it expects the withholding tax notification for ECBs in a month. How do you read what the government and the RBI have said on withholding tax?

Sanyal: If that comes, it would add to the potential of inflows via the FII route from all possible corners. That will be something positive. In fact, in the context of demand and supply for overall dollar and rupee here in India at the moment, the government is already trying to fight near-term damage.

If you actually project the balance of payments (BoP) for the full fiscal year, there are few predictions about a big short fall in the overall BoP.

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The very nature of India’s BoP is such that all the outflows are very regular because they are trade-related. The inflows are in the form of remittances or capital inflows which can keep waiting for a more opportune time and that’s why the near-term mismatch becomes compelling at the moment.

Any change in the tax rules will actually help the rupee in the near-term.

Q: Since you are talking about braving the short-term hump on the basis of what was announced this afternoon, do you really see the dollars coming in?

Sanyal: I would still say that nothing dramatic has been done to actually overturn the global risk sentiment and put the verdict in favour of the Indian rupee. I think an announcement of NRI bonds can do wonders to an extent.

Q: You were talking about widening the window to USD 50 billion. But does it make sense for the Reserve Bank to revisit the millennium deposit-type scheme. The RBI governor’s comments a few weeks ago didn’t seem to give that impression that that it was feasible. What is your own opinion?

Mecklai: It is something that could have been tried. My sense is that global environment is really not very good. People are really holding on to cash. Of course, NRIs investing in India is in a sense like cash, so it would probably be a good idea.

Right now the RBI and the government are still uncertain. With investors believing their hands are tied, something has to be done to instill confidence. It has to be done differently and aggressively for better impact, because it’s very treacherous market right and to top it all there’s Europe.

So if you are trying to attract money from overseas, the existing environment is not very attractive right now.

Q: Give the global context and India’s own domestic compulsions, do you believe the rupee has probably seen its worst?

Mecklai: Like I said, the rupee is more or less at the peak unless the dollar strengthens sharply overseas, which is certainly a possibility because the way Europe is going, at some point it could all fall apart.

So, hopefully the rupee will hold at the 56-57 range. It’s really hard to call. At the start of the year, I forecast 47-57. Of course I want the rupee to hold at 57, but forecasts are forecasts, what you really have to do is to not fight the market.

Q: What is your forecast for the rupee?

Sanyal: The pressure will not go away, but given the fact that the rupee has weakened quite significantly, some of the benefits like weaker commodity prices have not really been reflected. I expect the downside to be limited except for global risks.

Q: Are you anticipating any further Reserve Bank initiatives?

Sanyal: There could be some follow-up action. Over the last few months, every time the market assumed that the RBI had exhausted all its options, the central  bank threw surprises with new measures. So, far none of those measures have yielded any dramatic results, but the RBI’s their kitty is not really empty yet.