Dollar supply most effective tool to rescue rupee: Deutsche

In order to contain the unprecedented fall in Indian currency, dollar supply in the short term could be the most effective tool, observed Sameer Goel, Head of Asia Rates & Currency Research, Deutsche Bank.

Rupee's fall is in line with currencies of other emerging market economies. The Indian currency was more vulnerable to further fall among other EM currencies due to India’s wide current account deficit and high fiscal gap, he told CNBC-TV18 in an interview. The rupee today weakened to 59.9275 per dollar, past the previous all-time low of 58.9850 touched on June 11. "I do think ultimately the INR will become much more of a beta play to EM, but in the initial phase of adjustment obviously the market's panic will be becoming a much more indiscriminate selling rather than necessarily being selective in terms of which currency they want to sell," Goel noticed. He further added that the 60 mark would be come a natural magnet for the currency market as it is a big psychological level. Goel however expects some market intervention from the central bank now. Even Raghuram Rajan, Chief Economic Advisor to the Finance Ministry today said that the government was ready to take measures to curb rupee fall. Goel sees possibility of increasing dollar supply through a sovereign external bond. "I think to see the top in dollar-INR, we will need to see some bit of stability and calm come back," he added. Below is the verbatim transcript of his interview Q: What does this kind of selling that we are seeing in emerging market (EM) bond and currencies look like? Is there much more to go or at some point will the currency look so completely oversold that you think the selling is likely to end soon? A: I would make the same point I did on your program a couple of weeks ago. This needs to be seen in context of the broader dynamic of EM currencies, which are getting hurt by the threat that has driven chunk of capital flows into EMs over the last few years, which is balance sheet extension by the Fed will gradually be wound down. As you said the Fed has now given more clarity on the timeline, but I would argue inadvertently that by saying that the wind down will take place till about middle of next year, it has in effect introduced more rather than possibly less volatility. This is an adjustment process which EMs will have to go through. You are right at some stage there is value which comes back into any particular asset, but I think at the moment we are certainly in a phase where you have the first knock on adjustment effect to most of EM and Indian Rupee (INR) needs to be seen quite in that perspective as well. As we have discussed before INR does have the advantage that offshore ownership, particularly into the local fixed income markets has been relatively small to begin with and has got liquidated to a significant extent already. So there will be probably a natural limit to that selling. However, the wide Current Account Deficit (CAD) and the need for financing that on a regular basis is something which puts India at a particular disadvantage in such a volatile global capital environment. Q: At this stage do you want to take a guess on when the INR might start looking unattractive to sell, it is 60, is it 61? Do you want to make any guesses in terms of levels? A: It is very difficult to make guesses. As you know we are very much in uncharted territories. I think at the very least having seen the kind of levels we have, 60 becomes a natural magnet for the markets if it is a round big psychological level if you might. I think to see the top in dollar-INR we will need to see some bit of stability and calm come back to the correction overall in EM markets. The rupee for all the underlying story about a shift in the trade accounts or indeed the measures and rather encouraging ones which are being made by the government to try and turn around the flows on the capital account I do not think INR can be seen in isolation from the broader EM dynamic at this stage. Q: The Finance Minister had held a press briefing just a few days back when the rupee was very vulnerable and was close to breaching that 59 mark as well. But that time he did not announce any short-term measures which could perhaps stabilise the rupee. In just about a few minutes we will be getting the Chief Economic Advisor Raghuram Rajan who will be addressing the press briefing. What can we expect from the government which could help the rupee in the short-term?
A: When the markets are in such a panic adjustment stage, for any policymaker or central bank the obvious choices are either with respect to market intervention to try and provide the dollar, which is immediately bid up by the market or alternatively from a short-term perspective and even in their previous instance they had talked about the possibility of increasing dollar supply through a sovereign external bond or some such measure. Most of what is available to the policymakers at this stage are ultimately underlying policy structural steps which while being very desirable are ultimately a bit more medium-term in nature. From a short-term perspective to calm down the markets it is effectively the supply of dollars which becomes most effective. Q: Do you expect the Reserve Bank of India (RBI) to continuously sell dollars. We understand they sold today at 59.9, given that the forex reserves are not that high?
A: The forex reserves are sufficient and prudent from the perspective of coverage which they provide on monthly imports and on the basis of other credit metrics. The central bank would obviously be fairly concerned that there is a limit to how much drawdown or intervention it would like to achieve and as Dr. Rajan himself has mentioned earlier and has officials from the RBI too, to an extent this is happening as a beta to a wider EM carry unwind dynamic it becomes a little bit more futile for any individual authority or policymaker to necessarily stand in front of that market price action. Q: Do you expect a lot of FII debt to flow out of India? What we were told in the first rush of that USD 3 billion that went out starting from May 22nd was that it was the money that came in after the Withholding Tax cut was announced and the Mauritian Tax Residency Certificate (TRC) reassurance came from Chidambaram, that coincided with the crude and gold prices globally falling and India's current account therefore looking more manageable. The feeling we got from some traders was that that hot money or the money that came in, the last in was first out, but thereafter now people will perhaps not sell in a hurry and will wait for things to relax a bit. Is that your sense or do you think that these are algorithmic trades and as the rupee begins to trim their earnings debt will move out pretty fast?
A: I think it is a bit of both. We have seen almost about USD 5 billion of liquidation or drawdown in offshore holdings of Indian debt. There is still about USD 30-31 billion which is left in there. Surely one should expect that there is a certain chunk of core holdings by offshore investors of Indian fixed income which is either with sticky long-term holders like sovereign wealth funds or even for that matter with index investors but who are in there with an access to a very big market and in keeping with the market capitalisation and size of the economy. Having said that and what we have seen thus far is clearly the ones which have either had the poorest entry levels and therefore are the most vulnerable to an absolute return drawdown which have been the ones which have been liquidated. The dynamic is very much in place. As the currency weakens you will have more of these positions and particularly the ones which are not benchmarked to any index, more of those positions will keep going underwater. So while I would not call this necessarily as algorithmic or the fact that this can keep continuing, but we must also see that to the extent that there is a dynamic driving part of these holdings due to the drawdown in the currency to come under pressure, that dynamic continues. So to that extent these positions could remain vulnerable. Q: Do you think hereafter INR falls with other EM currencies or will it still underperform, fall more than comparables?
A: EM is very big in generic universe. If you look at parts of EM, especially outside of Asia like Latin America in particular the INR has actually fallen very much in line with most of those currencies and not necessarily underperform them. Where INR is underperforming is with respect to a lot of other parts of Asia, but then there is a region for that which is that the market like India with a much wider current account and fiscal gap dynamic is obviously more vulnerable compared with a lot of other parts of Asia which at least run good current account surpluses. There are certain similarities in Asia, for example, like in the case of Indonesia which is also a currency which is coming under pressure. You are right, I do think ultimately the INR will become much more of a beta play to EM, but in the initial phase of adjustment obviously the market\\'s panic will be becoming a much more indiscriminate selling rather than necessarily being selective in terms of which currency they want to sell.