Re may cross 55; RBI can't do much unless govt acts: CLSA

As the rupee slide continues, Rajeev Malik of CLSA feels that it is pure risk-off dollar strength that is playing out. The global risk off angle may force the rupee to see further downside despite RBI measures coming through, he said.

He however believes the rupee problem is not the underlying problem. "We haven’t seen any meaningful corrective action from the government to address any of this. I think it is equally important to think about India and its imbalances away from just a typical growth inflation kind of a trade off," he said. He goes on to say that the RBI will not have much room to ease unless the government can actually deliver meaningfully on the fiscal front. Below is an edited transcript of his interview with Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video. Q: Everyone has been watching the rupee more than anything else this week. Would you say we are getting the same bark that other Asian currencies are or do you think there is something different in the way people are approaching the Indian rupee? A: We are pretty much getting the same shafting that other Asian currencies are getting. This means it’s, to a large extent, a pure global risk off dollar strength playing out. Don’t forget currencies are relative priced. So if the dollar will strengthen everything relative to the dollar has to adjust. The best indication of that is to track the Singapore dollar. This is one of the best managed currencies in the region of a country that runs roughly 16% of GDP current account surplus. It is a huge financial centre and faces none of the problems that India has for example. Despite that, the Singapore dollar has actually depreciated about 3% this month alone. So it is nothing compared to what the Indian rupee has gone through. I think much of the move on the rupee earlier on was fundamental. In the sense, the rupee had to correct whether it was inflation differential or lack of policy coherence etc. Much of that is over but we still have to play out the global risk off angle, which is why further downside can't be ruled out despite RBI measures coming through. Q: When you put that report out on 55 to the dollar, you were suggesting it would be the year end target. It happened in two months, what are the chances of an overshoot from here? A: Absolutely, currency is a moving game; it’s a momentum build up. A little did we know that the government rather than taking any constructive action will actually be scoring self goals. The 55 target was a hugely non consensus call. Despite that, we are almost within kissing distance of that. So you will see a certain response coming through. But a lot of the responses that RBI has will be timed buying tactics. Weaker rupee or the pressure on the rupee is not really the underlying problem; it is just a symptom of the underlying problem. We haven’t seen any meaningful corrective action from the government to address any of this. I think it is equally important to think about India and its imbalances away from just a typical growth inflation kind of a trade off. I don’t think RBI will have much room to ease unless the government can actually deliver meaningfully on the fiscal front. I think people are just looking at certain individual items and trying to draw conclusions, they are missing the wood for the trees. Q: What is your view on crude, which has come off to a USD 107 per barrel this morning. Do you think that can fix our macro issues or do you think there are other parts of the piece which still make you cautious about Indian macro respite one key parameter moving in our favor? A: It is an important adjustment, which can be favorable to us both in terms of the current account deficit and from an inflation metric. What people overlook is what's driving that crude correction is very important. If it is risk off then we will still suffer as far as capital flows are concerned. So it is not a coincidence that the kind of correction you have seen in crude despite that rupee is actually weaker whereas everyone only focuses on just the current account side. You have to look at what it means for capital flows as well. There is a reason why I label India as a global risk on-off fire ball. If tomorrow all of a sudden risk is on, I don’t think anybody would be worried about the rupee or about any of the other problems but that will just give us a bit of time. But is the government going to fix anything during that time? We haven’t seen much so far. Q: You have been talking about the threat of inflation rearing its head again. But people are split over the last inflation tick we got in the sense that it didn’t really hit core, it was food inflation. What is your sense of where that part of the puzzle could be headed over the course of the next few months? A: A lot of it is going to be a function of two different dynamics. One is in terms of what's happening to commodities, which will clearly offer a positive tone as far as inflation is concerned. Some of it will get compromised by a weaker rupee but demand is also softening. The other part is really how the headline is going to behave and we come back to food inflation. Don’t forget households don’t necessarily dig into core inflation. The core is at 4.95%. If you try and tell somebody that that’s really what you should be looking at, you would be just requested to leave the room kind of thing. You look at one year forward, consumer household expectations, they are sitting at 12.5%. So there is a lot more adjustment that needs to happen. I think a very rough metric one can use is look if your headline WPI (Wholesale Price Index) inflation will be anything between 7-8% for the next several months and your repo rate is already at 8%. I don’t think RBI has much room to cut it from that level. All the ones who are arguing about weaker growth etc, will soon start focusing about that issues like interest rates have been cut, deposits are not growing up, we will come back to a broader another offshoot of a liquidity problem. So piece meal measures are not going to work. Q: Where does that leave the RBI because one thought when one looked at the global situation that perhaps they could move more easily on rates? You think they can or it’s going to be a tough call for the next 6 months and how much they can ease? A: I think what's happening on the balance of payment side just makes it a lot more difficult. Don’t forget if the rupee was sitting at 50-52 the arguments could be very different which is where we come back that we are essentially going through a structural adjustment that is needed and this is the orthodox approach. Below trend growth, try and compress aggregate demand, keep monetary policy tight. Will there be costs and consequences? Absolutely but when the government is not doing anything on the fiscal front, the monetary still has to continue keep on adjusting it and when I say something on the fiscal front I don’t mean just a token nominal move as far as petrol prices are concerned. Q: So what are your observations on how the RBI has approached the rupee’s depreciation so far? We have hit new lows over the last 3 sessions, the RBI has come in periodically, intervened and then stepped back and not quite pulled the rupee back from the brink of a new low. Do you think it is doing the right thing? A: I think it is doing the right thing. The last thing I would want to see is RBI draw a line in the sand at any particular level and keep on wasting its reserves because we don’t know how the global situation will develop. When those reserves keep falling even though India has a fairly comfortable starting point from here on that will actually spook or make people a lot more nervous. Whatever RBI has up its sleeve; whether it is trying to open up a special window for oil companies for dollars etc, these are all messing around with the broader market mechanism. They are not fixing the underlying problem which is where we come back. The solution for lot of what is going on is really with New Delhi. RBI’s approach, measures can buy some time but since August of last year when the rupee really started to turn in a big way, what meaningful action have we seen from the government really.