RBI won't engineer slowdown to fix rupee: Deutsche Bank

Taimur Baig, Deutsche Bank expects rupee to hover around 59 against the dollar today. He believes the measures taken by the Reserve Bank of India (RBI) since past two weeks are aimed extensively at checking the rupee volatility.

Speaking to CNBC-TV18 about the RBI policy on July 30, he says the regulator might have to issue clarifications ahead of the policy to signal it does not want to destabilise growth sentiments at the expense of stabilising rupee.

Below is the verbatim transcript of Taimur Baig’s interview on CNBC-TV18

Q: What kind of immediate impact do you expect on the bond market and the currency market because of this Reserve Bank of India (RBI) decisions?

A: We are already seeing some offshore market action as far as rupee is concerned and due to that we already see rupee heading towards low 59. Once your market opens you will see something in that range today and could be even lower than that.

The measures taken by the government since last week are all extensively aimed at addressing rupee volatility. I am using the word extensively because there are far reaching implications of that with respect to the outlook for the economy, what happens to liquidity for genuine borrowers not just speculators and what that means for economic growth.

The July 30 policy statement is too far away, RBI will have to come forward and make some more clarifications in the coming days and weeks long before that policy meeting takes place. This is because the central bank does not want to destabilise growth sentiments at the expense of stabilising rupee sentiments. They are inter-related and you cannot really engineer a massive slowdown in the economy or cause huge amount of negative sentiment as far as growth is concerned. Somehow, I expect rupee outlook to be stable.

Q: Given what the RBI did on Monday, is it nearly impossible that in the next couple of policy meetings they would be cutting rates in any form?

A: It has only been 10-12 hours since the announcement was made. If you have the repo rate which has been left unchanged and there are liquidity injections because of public expenditure, it is consumable that the effective rate, does not necessarily spike up just because the marginal standing facility (MSF) has gone to over 10 percent.

Indeed the effective rate is not a function of where the MSF goes, it is a function of where the RBI maintains liquidity and the liquidity adjustment facility (LAF) is managed. Now LAF is not going to surplus territory anytime soon. It is a negative territory and RBI is going to supply the market on day-to-day basis USD 750 billion of LAF support.

In the near term, the policy rate is not going to move but that does not mean that we are done with rate cuts. Infact this 300 bps spread between the repo and the MSF now means that if repo rate can come down, MSF will still be fairly dear and those banks which are significantly short of securities would not necessarily be able to get much lower cost. But if you are a genuine borrower, you would still get cash fairly reasonably through the repo window.