Attracting existing equity investors may help rupee: BofA

Attracting existing equity investors to park more funds will be more helpful to stabilise the free falling rupee, believes Jayesh Mehta, MD & Country Treasurer, Bank of America.

He feels not many long-only foriegn investors are invested in India as of now and those that are exposed have a short-term arbitrage view. Such kind of investors don't help the currency much and only provide some onshore liquidity. Also Read: US better placed; EMs to see selling pressure: BlackRidge  Below is the verbatim transcript of Jayesh Mehta's interview on CNBC-TV18 Q: What is happening in the rupee market over the last couple of days? The swiftness with which it has come down from 59.50 to 61 has it clearly unnerved a lot of people? A: It has unnerved a lot of people. It has a lot of collateral damage and the measures did help and there was a dollar weakening across adding to the help. On Tuesday there was a lot of local demand and the whole situation is now on the growth side. So, monetary tightening is a measure that central bank has taken and they may have the data on speculative position but at least in India the large banks, large corporates, none of them have much of the speculative positions and that is where the whole challenge is. At this juncture, we still feel we need something macro to manage the rupee and none of the macro has come. Looking at the two weeks announcements, even the central bank said that this is more of a breather for the macro to come in and none of them have really come in except for some restriction on gold and some report on the electronic goods which is definitely required. As Richard Jerram said that we have been funding our current account deficit (CAD) through equity flows and if the growth prospects with rate hikes goes away and we start seeing equity sell-off that again will not help the currency in a great way. Q: What are you hearing about bond outflows by the foreign institutional investor (FIIs), through yesterday and today? What kind of figures could bond market be looking at in terms of outflows? A: As of now when we say FIIs, they are of two types. One, long-term real money people for which due to the limit issue, with holding tax issue that got resolved only in the first week of May, we don’t really have large people setup to invest in India. They are not going to setup in this kind of environment globally and locally. The inflows and outflows are traders and short-term arbitrage people and from a currency point of view they are actually mutual because 80 percent of them would come one hedge basis. It does not impact the currency flow except that it gives a little liquidity onshore market but beyond that it does not really help the currency. From that perspective, we still need to focus on the existing investors which are the equity investors, we need to attract their flows which is crucial at this juncture. I am sure once things stabilise we will see the real money debt guys coming in. These are the people who will come unhedged investing in debt, but that is still 2-3 months away. Q: What has been the reset at the short-end in terms of where people expect yields to move at? A: On the short-end, people are worried that having done the measure that would stop them raising it further, if one looks at the Overnight Index Swap (OIS) market, it has moved up and that is where the worry is. What they make of this 10.25 MSF to 12.25 or 14.25 is the bond market really worried about. Secondly, unlike earlier times one does have a regular supply of Rs 15,000 crore of bond every week which was not the situation in 1998-2000 where one did not have an auction calendar. In this kind of market if new stocks are coming in the long term yields are also going to get affected. One has to look at it that mark-to-market (MTM) on all the banks would be huge on this situation. It is not only the net interest margin it is also the MTM which will damage the banks.