Unlike the government, forex-treasury consultant AV Rajwade does not believe that the dramatic fall in the Indian currency is due to global financial woes.
Unlike the government, forex-treasury consultant AV Rajwade does not believe that the dramatic fall in the Indian currency is due to global financial woes. The rupee has been one of the worst performing currencies in Asia and has been consistently hitting lows in the last fortnight, in spite of Reserve Bank of India (RBI) interventions by selling dollars in the forex market.
With rupee falling to record low against dollar, Pranab Mukherjee on Tuesday said the government is taking steps to arrest volatility in the foreign exchange market and the RBI will intervene when necessary.
"Global slowdown due to unfolding of eurozone sovereign debt crisis has, inter-alia, impacted the Indian economy through deceleration in exports, widening of trade and current account deficit, decline in capital flows, fall in the value of Indian Rupee, stock market decline and lower economic growth," Mukherjee said in a written reply to the Rajya Sabha.
Rajwade says the basic problem is domestically created, mainly the huge current account deficit. "I think so long that remains, the rupee would remain under downward pressure," he told CNBC-TV18 in an interview.
Below an edited transcript of Rajwade's interview on CNBC-TV18. Also watch the attached video.
Q: There is no point talking about levels because most of them seem to have been breached. Are you expecting the RBI to intervene today?
A: I do not agree with either of the comments of the prime minister or the finance minister that the basic problem is in the global economy. I think the basic problem is domestically created, which is the huge deficit on current account. I think so long that remains, the rupee would remain under downward pressure.
The Reserve Bank of India's (RBI) intervention could halt the downward slide for a while, but I think that is not going to be as simple as people seem to think. We have a net external liability in excess of USD 200 billion. The reserves are less than the commercial borrowing and there are limitations to how much reserves can be used just to prop up the currency.
I do not think that the downward slide -- the other side is of course unless the downward slide stops, foreign money will not come in but foreign money will come in not just if the rupee stabilises. But there are a large number of macroeconomic steps taken by Delhi and I think they don't seem to be in the mood or strength to be able to take any of those.
Q: In the absence of any big changes happening to fundamentals at least in the short-term, how much lower can we go from here?
A: I never predict levels because it is not possible to predict them. In my view, the changes in fundamentals and the price level by the market, the correlation is not very strong and I don’t think I am capable of -- chartist can do it to an extent over the very short-term. I don’t believe in chartism either.
Q: Give us one word on the bond yields and if you are expecting to see any relief over there because RBI has decided to pump in about Rs 12,000 crore through the open market operations (OMO) route on Friday?
A: Not really. In many ways the OMO route is becoming a proxy for a monetisation of the fiscal deficit. The monetisation directly was banned by the act -- I forget the name now -- but in effect it is taking place indirectly through OMOs. So I think that is what is happening and we also need to keep in mind the fact that inflation is going up, is likely to persist on the upward path for the foreseeable future.
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