Rupee at 54/$; may go to 53/$ in near term: RBS

The current account deficit (CAD) is expected to come down as imports of crude oil, gold and edible oil are likely to get cheaper with the fall in the international prices of these commodities. He says, if gold remains at current prices and brent at USD 100, we could see an impact of 1.5 to 2 percent on CAD.

In the midst of falling commodity prices, rupee has appreciated to 54.03 per dollar. But Sanjay Mathur of RBS told CNBC-TV18 if exports are not growing and WPI moves lower, then the appreciation in rupee does not make sense. "It would be better to keep it stable and support the trajectory of exports," he added. His estimate for rupee is at 53.50 per dollar in near term. He agrees with Reserve Bank of India that the wedge between the Consumer Price Index (CPI) and Wholesale Price Index (WPI) is growing. But, from the standpoint of stability, CPI is as important as WPI, he concludes. Below is the verbatim transcript of his interview to CNBC-TV18 Q: Do you think that there is going to be a seminal change in India’s Current Account Deficit (CAD)? The way things are panning in the commodities market. A: It would be a very strong impact. Whether it is a seminal change or not is a bit too early to say. However, what we calculated was that if the gold is at current prices and oil is at around USD 100/barrel, one could see as much as 1.5-2 percent impact of the CAD. That would be certainly positive. What we do not know is how exactly the Indian consumer would respond in terms of demand for gold. The Consumer Price Index (CPI) is still very high. Real interest rates and Real deposit rates are negative. So, does he actually buy more gold in terms of volumes or does he step back in line with the falling prices. That is still a question mark. Q: Inflation number is seminally down, sub-6 percent, the lowest in 40 months. Do you think the war on inflation has been somewhat won? What will you look at in terms of a trajectory for the year? A: We are definitely headed, in terms of the Wholesale Price Index (WPI), to a number that would probably go under 4 percent. There is one thing that I do want to point out about the inflation report. The WPI report, which is the revision made to the January number was a very hefty revision. So, it is not that everything is clear. The second point about inflation is that it is not WPI alone. If we go back to the Reserve Bank of India’s (RBI) statement they were quite categorical in saying that there is a growing wedge between retail and wholesale price inflation. From the standpoint of stability at this point in time the CPI is just as important as the WPI. Q: Would WPI coming down to 4 percent be a sustainable level? How do you see the trajectory of WPI perhaps over the next few months? A: By September you will see a level of around 4 percent. Thereafter, it stabilizes and sort of starts to move up. Partly because of base effects, but I do not foresee the WPI per se to be at levels that will cause a lot of concern. Q: I was thinking more in terms of elbowroom for the RBI. If it indeed heads to sub-5 percent even for three or four months, how much will they do you think? A: If one looks at the fall in commodity prices plus WPI it certainly increased the scope to somewhere between 50-100 bps. Let me say why it is not possible to move exactly in lockstep with the WPI. The problem is that if we look at the banking sector, today loan to deposit ratios are very high for this stage of the business cycle and part of the reason is that deposit growth is not there. It is very weak. For that the CPI matters a lot more, because it is a household sector’s money. As long as they do not increase their deposits it would be very difficult to be able to cut rates. Q: With the WPI falling down to 4 percent by September perhaps about 1-1.5 percent benefit to CAD with falling commodity prices, how do you see the rupee moving in all this? A: I think where we should be on the rupee is a level of around 53.50. One of the issues you are going to have is that if exports are not growing and WPI has moved lower, then it really would not make sense to allow rupee to appreciate more. Rather it would be better to keep it stable and support the trajectory of exports. Q: So 53.50 you think would be ideal, right? A: We think so, yes. Q: Do you think the difference between WPI and CPI will continue? For instance, you spoke about a 4 percent level on WPI maybe by September. Do you think the CPI will still be running at this high closer to levels of 10 percent or do you see a seminal fall in WPI and the gap between CPI and WPI narrowing which will give the RBI some comfort? A: I do not have a very good answer to that. If you look historically until the last two years or so, the CPI would generally be 1.5-2 percentage points higher than the WPI and the symmetry has broken down. There are many more reasons. CPI is lot more contingent on things like food prices, accommodation costs. We have seen that continues to rise and thirdly, because the CPI has a bigger services component and that is very dependent on labour costs etc. which really have not come down as yet. It is not very clear as to how quickly it would come down and whether it can come down to a reasonable level. Q: If inflation falls so seminally lower what is the trajectory for growth? Is there a sub-4 percent number somewhere? A: No, I think that the way last year’s numbers have panned out we are still looking at around 5.5 percent. I would think that unless the report on the monsoons is unusually poor I think that is roughly where it is. The point I want to make is whether it goes to 5-5.5 percent it is not that material. The point we have to consider is that growth is substantially below potential. The windfall gain you are seeing in inflation is also related to the global commodity cycle. So, it is not a one to one relationship between growth and inflation right now.