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FM moves to tame deficit won't arrest rupee fall: Macquarie

In an interview to CNBC-TV18, Nizam Idris, head - EM FX strategy, Macquarie says the current measures taken by the RBI will not help solve structural problems for the rupee.

August 13, 2013 / 05:14 PM IST

Stepping up its resolve to rein in the current account deficit (CAD), the Finance Minister on Monday launched a new set of measures like asking public sector banks to raise foreign loans; deregulate interest rates for non-residential individuals (NRIs) and ask banks to go for quasi-sovereign bonds for infrastructure financing.

However, Nizam Idris, head - EM FX strategy, Macquarie doesn't expect the pressure on the CAD or the rupee to ease soon. He says the pressure on CAD is due to quantitative easing tapering talks.

Also read: Rupee to hover in 61-62/$ for now; 63/$ likely: HDFC Bank

Idris expects the currency to breach 62 against the US dollar and says the current RBI moves will not help solve structural problems for the rupee. He explains the pressure on the currency is due to two factors- the widening current account deficit (CAD) and the continuous capital outflow from the Indian market. As both these factors are out of RBI's ambit, he highlights the government should bring in robust reforms to rescue the drowning rupee.

Below is the edited transcript of Idris' interview to CNBC-TV18.

Q: We had a decent math that the Finance Minister (FM) put out yesterday about how he plans to bridge the current account deficit (CAD) through public sector banks raising foreign loans. You don't think the investors or traders are impressed by that math? Do you expect further pressure on the rupee?

A: Yes, we are still looking for more way on the rupee. While these measures are put in place to mitigate some of the pressure, the underlying pressure from CAD as well as capital outflow are having its effect on the currency. These factors are still outside of the Reserve Bank of India's (RBI) hand and broadly speaking on a longer-term perspective, we need broader reforms to encourage more consistent inflow rather than one of loan issuances and stuff like that. So, I think 62 will be broken. 

Q: If 62 is broken is that where you see the rupee stabilising?

A: We have a three month forecast at 62 but meanwhile we expect a breach of 62/USD, the question is how far the overshoot will be. And all these measures that were mentioned will become irrelevant. It may mean that overshoot beyond 62/USD may not be great.

We could see the overshoot beyond 62 going to 63-63.5/USD and things could stabilise but these measures are all important to take the pressure off the rupee when the external issues like the Fed’s end of QE for example will kick in. That has to happen, that cannot be avoided so we are just preparing for it to happen and we could go to 63.5/USD before the FX market globally stabilises again.

Q: So when you say you need more structural reforms to be convinced what are you expecting to hear? Is it anything to do with higher diesel price movement, the quantum, the tenure or anything else that you are looking out for from the government?

A: The particular reform that I am looking for would be to increase productivity. It is important to boost long-term growth prospects. Those would actually mean that FDI inflows will be strong. And those are the kind of things that will make the funding of the CAD more stable and more consistent going forward. Rebalancing of government’s spending to narrow the CAD, I think the fiscal deficit actually leads to the wide CAD so that needs to change as well. Supply bottlenecks need to be resolved. So, these are the reforms that will change the longer-term picture.

first published: Aug 13, 2013 10:22 am
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