Boost to NRI deposit could tame falling rupee: BNP Paribas

The rupee continued its freefall and breached psychological marks in almost every session in the day. It ended at 63.13/USD after touching an all-time high of 63.30/USD. Analysts believe that twin problems of high current account deficit (CAD) and likely strengthening of US economy are the reasons for the currency’s decline.

Manoj Rane of BNP Paribas says that the Reserve Bank’s (RBI) measures were not effective as the current market is thin and ‘illiquid’. There is a need to substitute foreign inflows with domestic investment or a non-resident deposit programme, he told CNBC-TV18. Also read: Emerging market taper terror 'quite overdone': Mobius Below is the edited transcript of his interview to CNBC-TV18. Q: What have you made of the rupee’s sudden freefall? A: It has been weak throughout the day, helped in some part by positive data in the United States (US) and US yields being higher over the weekend. This may be the last round possibly because of no measures but only few comments having come out. Infact one comment which came out from the ministry was actually to the effect so that we have done all that is required and nothing much maybe done. So, it spooked the market a bit and possibly driven to conclusions that there might be nothing immediately forthcoming in trying to stem the tide. Q: The way the rupee went from 62.50 to 63 and now to almost 63.50 who is to say that even 63.50 is sacred for that matter. It was agreed that maybe 62.50 or so is seen as a bit of a ceiling; doesn’t look like that. Is there any bottom now in place or are we now just simply headed towards 65? A: It is always tricky to call a top or a bottom particularly when there is momentum and measures have not really done anything to turn the flow tide. This kind of pressure may continue as it is a thin and illiquid market. Small flows are going to exaggerate moves and unfortunately whatever measures have been there, have been so focused on the liquidity side that they have really done nothing to address the currency side. Q: Just give us an idea in trade terms. What is the correlation between the emerging market (EM) currency space as well as us? For example, other currencies such as the rupiah etc. A: We have got the tag of an outperformer on the wrong side and unfortunately we have possibly weakened more than the others. So, it indeed remains a little bit of an India-specific problem, possibly also relating to our very large current account deficit (CAD) economy in the region. That is the reason why we are bearing the brunt. Q: There are targets of 65 to the dollar, which is year end. It seems like we are possibly going to approach 65 sooner than we thought. Could we see a further depreciation beyond 65 and if so, what would those targets then be? A: I am very reluctant to put targets precisely for this reason because market makes a fool or most forecasters. The only hope and typically how it plays out is when the currency is in an overshoot range as I think it is definitely getting to be for the Indian rupee, it might still go much more in terms of overshoot. Then we will have to take a fresh look at year end targets because then it should appreciate from there. It is important for the market to perceive as well that it has substantially overshot, I don’t think there is any doubt in my mind. I hope that other people start thinking as well that the currency is getting into an overshoot range. Q: The problem is that this overshoot can remain for long. What do you think will turn the corner for the currency to come back from this current vicious cycle that it has got into? A: Significantly large inflows into the country will do so. We have about USD 300 million negative outflows on a daily basis just on account of a CAD. The point is that you do nothing in 10 days; you have lost USD 3 billion. This tide has been reversed or has been met. These outflows have been met over the last several years by fairly significant capital inflows. In an environment like this when there is lack of confidence, you are not going to see capital inflows. So, there was need and there is still need to try and substitute these capital inflows with possibly something like a non-resident deposit or anything which would help garner a significant amount of foreign currency. Unfortunately, we have seen few and far between initiatives to set something like that into motion.