According to Brijen Puri of JPMorgan, the Reserve Bank of India (RBI) will have to come out with sovereign bonds to stem the rupee fall.
Brijen Puri of JPMorgan believes the Indian rupee could reach 65 against the dollar much before December. In an interview to CNBC-TV18 he said so far the government has taken serious measures to contain current account deficit (CAD) only on behalf of the rupee but nothing significant has been done to check the oil, fertiliser, coal, iron prices.
The Indian rupee touched its all-time low of 62 against the dollar on Friday. Though it recovered soon after, but market analysts are getting skeptical about the currency move.
He feels that the Reserve Bank of India (RBI) should opt for issuing sovereign bonds to stem rupee's fall.
Below is the verbatim transcript of Brijen Puri's interview on CNBC-TV18
Q: Why isn’t anything helping the rupee stabilise? What is the big problem?
A: Everyone was hoping for some amount of discussion around how the government intends to bring down the current account deficit. On the positive at least there is recognition that it is not just additional capital that we need but we need to address the current account deficit itself.
The finance minister has committee a number of 70 billion. We can quibble about the last 4-5 billion here or there depending on whether he will get it or not, but that is a positive.
However, the market was disappointed in terms of the way forward; how do we go about it because in the last few years where the current account deficit has widened around gold.
The government has addressed gold in risking the movement into the unofficial market but apart from that oil, fertiliser, coal, iron ore are not very easy.
Oil, politically we been seeing 50 paise a month rise but with the global oil prices rising up, it is not enough and for the rest we are stuck in a difficult situation between the executive and the judiciary and are not seeing how that will be addressed and therefore, how the trade deficit would come down.
The market was most disappointed with it and then Wednesday’s measures spook the market. Tomorrow, if rupee does not stabilise and if this continues, will we see something like this on foreign investors; it is something market would get jittery about.
Q: In the last one week, after all the measures that have come in, would it be required for currency watchers like you to scale down your year end target on the rupee further? Many people believe that by the end of 2013 we will be sitting at 65/USD. Where will we be sitting by the time December comes up?
A: There is a large event coming up in September, which is the Fed tapering. More than the exact number that the Fed decides to taper by is going to be the language and in this Fed meeting the Fed will be coming out with its 2016 forecast for their economy. It is something the market would be looking for to try and price in the kind of tightening we will see and given the data flow what is diving the fear in the global markets and therefore, higher US yields.
So, if we see more hawkish tone of the Fed, we could be testing highs. The authorities have been at pains to draw a line in the sand at least temporarily for the dollar-rupee. However, it doesn’t seem to be working and the market seems to perceive them as a little more desperate and without the possibility of having a material medium-term impact and that is spooking the market.
Coming back to the target, 65/USD is possible depending on how the Fed comes out. In the very near-term given the resolved that the authorities have shown, the authorities would want to protect the 62-62.5/USD kind of level because if they don’t and we go through that easily, we could reach 65/USD much sooner than December.
Q: What are the measures we could see on the rupee to control it? What are experts talking about to actually stem the fall and something even more aggressive?
A: On the trade deficit front, a lot of it requires a prolonged discussion and debate both within the critical circles, the legislature as well as with the judiciary. So, in the very short-term people are hoping for something more on the capital account, be it the sovereign bonds, the impact of those coming to the market.
There is some talk about getting INR Gsecs into the global bond indices. If that does happen, we could see a large onetime inflow but that is something which we need to take carefully because concurrently while we are investment grade, if we do see a downgrade to non-investment grade, we could see a reversal of those flows fairly fast and at a time which may not be opportune.
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