RBI may rollback volatility curbing moves if rupee sees 58

The global markets are quite today, but there is some local disquiet again says CNBC-TV18’s Udayan Mukherjee. On Tuesday late evening, the Reserve Bank of India (RBI) fired a few more bullets to save the rupee.

These measures have a bad connotation for growth and bond yields, though it will probably manage to give some more support to the rupee in the near-term. That is the key thing the market and the beleaguered banking sector will be focusing on as trade opens, adds Mukherjee.

Below is the edited transcript of Mukherjee's analysis of the market

On RBI’s measures

The RBI measures earlier didn’t work as expected. It may continue with its measures if the rupee does not pull back very significantly and that is the fear. The RBI has now  taken a call that irrespective of whether its measures are in sync with the government or not, it will defend the rupee now and that is its number one agenda and growth can go for a toss.
We are probably in that dangerous kind of cusp. Time will tell if this is going to be an expensive policy mistake that we are making because despite what the RBI is doing, the market will understand that the banks will come in repeatedly now to protect the rupee around 60 and that is the only upshot of what has been done.
As we get closer to the end of the year, may be roll forward another quarter, it may begin to dawn on people and the central bank that we may be looking at a sub 5.5 percent growth number for this year as well and not the 6 percent number that the finance minister is talking about. So, I hope it does not turn out to be a very expensive sacrifice.
The only silver lining is that this time the growth problem has not been about interest rates. At best it has played a peripheral role which is why the big cutting of interest rates which preceded these hardening moves had no impact at all in reviving growth.
Therefore, the optimistic might argue that any kind of clamping measure on the interest rates will also not hurt growth beyond a point because that is not what this growth problem is all about. If one is charitable, he may think like that, but I think it would still cause a lot of consternation in the system which is already clutching at straws to see some signs of growth and these measures cannot help on the margin with that.
One of the pillars of the market has been taken away. There is expectation that we will be playing with much better interest rates as a regime over the next six-twelve months and that we will atleast have a supportive win towards equities. That part of the story has changed quite completely.
The fact that we are repeatedly seeing the benchmark bond yield trade above 8 percent shows that we will probably go very close to 8.25 very soon. So, that is not supportive and cannot be supportive, not just for banking and non-banking financial companies (NBFC) stocks but also to the market at large.
We have been in a very precarious growth position. This is not going to help on the margin. Last week every banker was saying that it is just temporary, it will be taken away and one week later, the RBI has tightened the screw even more. So, it depends on how long this holds out because my sense is that this will be in place or any relaxation in the measures will happen only if the rupee firmly gets stuck or anchored around 58/USD.
If the rupee for whatever reason starts edging towards 60/USD, there is no way these moves are going to be unwound. So, how much time this takes is also dependent on some external factors. It is a big risk, calculated one maybe, from the RBI’s perspective that they are taking. One can only hope that this will rein in the rupee a little bit because if it does not, there might be more unpalatable measures for growth which will come in the weeks ahead. On the rupee
No one expects to see a big pullback in terms of the currency. One might just get a far more mulish kind of stance from the RBI. It is almost like ‘I will teach you a lesson,’ kind of stance. So, I hope they do not go to the other extreme by being provoked by the market to come out with sterner measures to tighten liquidity further so that they yank the rupee back up to that sub 58 kind of levels.
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It is a difficult job to fight the central bank as we all know and if market participants keep testing the RBI as they have over the last 10 days, I worry that we will end up making some serious policy mistakes out there. So, this morning I pray that the rupee does do the desired number that the RBI is hoping for which is going to 58. Atleast we will be spared some sterner measures from the RBI in the days to come.
It is possible that the rupee settles in a 58-60 kind of zone even for the next few months because what market participants also realize right now, is that the RBI is not just firing one bullet, it is repeatedly coming in with firing one by one the bullets in its gun and therefore market participants also will be a bit leery right now of trying to test the RBI beyond a point by taking very aggressive positions.
What this may do, is ensure that say over the next three months or so, the rupee does settle in a 58-60 kind of zone but eventually after three months, the RBI might also realize that what they have done is at the price of getting down GDP growth may be by 0.5 percent plus, at which point they might relent on these measures. Then, the weakness in the rupee will start coinciding once again with some more upward spike in the dollar. So, in the medium-term, we are not done with the rupees weakness. For the short-term, we might be done but probably at a price which is going to be quite expensive for the economy. On the market
Tomorrow is expiry so what can one say about the market. One has seen how the market moves around the expiry. So, it will do its own jig but if one just goes back 10 days and ask himself whether the environment for equities has got better over the last 10 days or worse, the from an India perspective, we would have to say that the landscape has probably turned worse with the way these tightening moves have come in. We live in very challenging times, stock markets are excitable beasts so they keep moving up and down with no real correlation sometimes with what is going on underneath.
This series has actually been spectacular, 500 points give or take a bit for a series is great but over the last three series we have been seeing these alternate kind of moves. One good series, followed by one bad series. So, on an average, I think the last three series have been 5 percent up down up. So, we are probably going to end this off in a good fashion. Maybe today we get a bit of slip in the morning and then that gets arrested because people do not want the Nifty to come off too much before the expiry tomorrow. So, the expiry is somewhere in this 6000-6100 kind of zone.
I think the bigger question starts coming in post tomorrow, when one is done with the series, done with the adjustments. A lot of the short covering that had to happen in specific sectors have also happened and then the series will start at the high-end of the trading band with some of these measures which have come in and would that let the market flourish in the face of what should be a fairly tepid couple of weeks of earnings as well.
I think the next series becomes a little bit more complicated and chances of weakness coming back from this 6100-6200 level on the Nifty again cannot be ruled out. So, the next couple of days belong to the expiry. One would want to let that get out of the way but I think the stars are slowly aligning themselves for maybe a difficult start to the August series given where the clock is starting from and given some of the local news flow which has also been piling up.