Sebi move on rupee harsh, but bodes well for eco: StanChart

In an interview to CNBC-TV18 Ananth Narayan of Standard Chartered Bank shared his views on steps taken by regulators to curb rupee’s fall. The Reserve Bank of India and Securities and Exchange Board of India (Sebi) clamped down on open positions that banks and non banks can take in the currency futures market.

Also Read: Indian rupee has resistance at 61.20-61.44: ICICIdirect.com According to him, combination of these measures has helped the rupee some extend.  Though these measures can be painful in the short term – they may restrict liquidity, increase volatility and transaction cost for market participants, but such controls help in the medium to long run, he added. Below is the edited transcript of his interview with CNBC-TV18: Q: You think that the increase in margins and reduction in open positions have kind of played out or do you think you will see them play out till July 11, and we could have that pressure on the dollar that the rupee will stand to it because of this steps up until July 11? A: I think one has to see in two levels. One, the immediate impact of the position unwinding in the Futures which is playing out right now. The second, the little more medium-term impact is a short intend from the authorities to try and control the volatility. What happened over the last couple of months was, there was a risk that we would spiral out into an unnecessary kind of panicky fall. It was important for some steps be taken to ensure that that does not happen. I think this is one of those steps which help in that direction to allow the markets to settle down, see the intent and take a deep breath and look at the way forward. Q: There were traders brooding that if you took away so much of the speculative positions in the market when real demand hits it hits rather hard because there is no short covering or long unwinding to buffer it as well banks will have to give wider quotes. Do you think that we are opening ourselves to the danger of more volatile moves? A: There are definitely pros and cons, no questions asked. Any kind of restrictions especially for market makers does restrict liquidity, it does potentially increase intraday volatility. It can increase transaction cost for clients. At the same time one must look at the bigger picture as well. There was a need to ensure that sentiment was brought under control. In that context while this can be painful in the short run it can help in the medium to long run to have controls of this kind. Q: Has the reaction already played out and from hereon is it likely to start trading to global as well as fundamental cues or perhaps you expect the unwinding to take place over the next few days? A: A couple of things need to happen. First, we need to settle down and look at things a little more dispassionately and then let the fundamentals play out. To some extent the fundamentals have improved on the current account already. We expect the trade deficit in June to have dropped to about USD 13 billion. Clearly we are seeing a lower import on gold right now. By itself the current account can come down to USD 75 billion where things stand right now. Clearly we need more and maybe more steps needs to be taken for current account deficit to be controlled even further. But I think some of the corrections are happening already. But a precursor to allowing the markets to settle down is giving some relief in terms of, the last couple of months with 13 percent depreciation in the rupee have been pretty torrid especially in the back of 33 percent depreciation over the last two years. Giving some relief in terms of sentiment definitely helps. Hopefully, the underlying fundamental improvements will also play out. More steps can be taken to bring the fundamentals back to an even. We do need things to happen – let us not wish away the fact that there are fundamental issues including on growth, infrastructure investments – all of that has to play out and the growth story has to come back but what is happening right now is hopefully a step in the right direction.