Rupee fall unique; don't see RBI stepping in soon: Kotak Bk

The rupee slumped more than 1 percent against US dollar on Monday. Mohan Shenoi, President - Group Treasury & Global Markets, Kotak Mahindra Bank says it's not just the Indian rupee, but all EM currencies are depreciating against dollar.

However, he adds the depreciation of the rupee is unique as it is caused due to the FII outflows from debt market.

Further he said that the RBI just wants to curb the volatility of the currency.  He expects the RBI to hold onto this position and only intervene when there is a lot of volatility.

Also read: Indian rupee hits record low, but some relief ahead

Below is the verbatim transcript of his interview to CNBC-TV18

Q: What is the sense you are getting? What we are given to understand that debt was already being sold off by Foreign Institutional Investors (FIIs) then the rupee fell and there is a further pressure both on currency and debt. Are you seeing this double pressure continuing even today?

A: I checked up for the last 15 days whether only Indian rupee has depreciated against dollar or there are other currencies as well, like the emerging markets where there has been similar depreciation. Between May 23 and June 7, rupee depreciated by 2.6 percent. While Thai baht depreciated by 2.4 percent, Malaysian ringgit by two percent, Brazilian real by 4.1 percent and Philippine peso by 1.4 percent.

Thus, this depreciation of rupee is not unique. Other markets are also experiencing depreciation of their respective currencies. The depreciation of the rupee is unique in the sense that it is mainly caused by the exit of FIIs from the debt side.

Equity appears to be quite okay, it is the debt side where there has been exit from FIIs, which is creating pressure on the currency. Now we all know that FIIs can’t participate in the currency markets, in the rupee market directly. So, what they do is they put a quasi currency trade by participating in the Indian debt market. Therefore what we are seeing now is, on debt side we have a negative of around close to USD 2.5 billion.

So, this is what is currently putting pressure on rupee. The problem also is that because we have a current account deficit (CAD) when there is depreciation, it gives an exaggerated picture on rupee than other currencies of emerging markets. Therefore one of the points is coming out with this depreciation is that any rupee-negative statement from authorities, whether it is a fiscal or monetary has a quick impact on rupee.

Fundamentally, rupee is a depreciating currency. Any statement which is rupee-negative immediately gets translated into further rupee weakness. Therefore we have to be mindful of the fact that some of these statements can be self-fulfilling, that we have to be mindful of.

Q: Since this rupee weakness is more of an emerging market phenomenon as you have been pointing out. So, do you see less of a chance as Reserve Bank of India (RBI) will intervene, not India specific? So, do you see the less of a chance of the RBI intervening directly in the forex market?

A: The statements from the RBI seem to indicate that RBI just wants to curb the volatility of the currency. However, does not want to directly intervene for a particular level.

So, I expect that the RBI will hold onto this position and only intervene when there is a lot of volatility.

Q: What would you watch out for in that case? You will watch out for US yields and the levels they trend to check when this might taper off?

A: This entire depreciation, dollar strength started on the back of fears of quantitative easing (QE) being withdrawn or QE being tapered off over a period of time. Ever since that fear has come into the market many of the carry trades are getting unwound and many of the emerging market positions are being reversed by the global players. That is causing this rupee weakness.

We should keep watching the developments on the QE front. If withdrawal of QE at this moment is only a fear of withdrawal, there is no definitive statement that it will be withdrawn. If there are more indications of QE actually being tapered off or withdrawn over a period of time we should watch out for rupee in that case.

Q: We are expecting dollar inflows from Bharti, Qatar Endowment Fund, then Unilever for the buyback as well. What kind of an impact will that have when they come through?

A: The market is expecting some of these inflows. On the back of that there is some hope that rupee will appreciate. That could well happen as and when these inflows come in.

However, you have seen the kind of outflows that take place particularly from the debt market, you have seen more than USD 2 billion in just 15 days. So, much of these inflows may get counter balanced by the outflows on the debt side