Deficit Re likely to weaken in uncertain times: HSBC India

In an interview to CNBC-TV18, Pradeep Khanna of HSBC India says with the instability arising out of the euro zone and the burgeoning current account deficit that we have, it is fairly natural for the exporters to be a bit circumspect about selling.

Khanna says it is high time either the government or the central bank come out with tough measures to get India’s derailing economy back on track or face the consequences. “It is fairly natural for a currency which is a deficit currency to weaken in an uncertain environment,” he adds. Below is an edited transcript of his interview. Watch the accompanying video for more. Q: What is the sense you are getting – are there no suppliers in the market other than the RBI?
A: The global scenario is quite jittery, the situation out of Europe. In this scenario along with the deficit that we have, it is fairly natural for the exporters to be a bit circumspect about selling. Most of them have in place what they would consider an appropriate hedging policy. I don’t think there is any desire to increase the percentage hedge ratio at this point. Yes, sellers are a bit limited and that does have an impact on the way the currency plays out. Q: Wouldn’t also importers shy away at 54.3? Wouldn’t there be a hope of buying things a little cheaper? Are you seeing any plateauing of the pressure on the rupee at all from domestic factors?
A: A lot of the volumes that are going through are not forward hedging volumes. Even import volumes that are going through are immediate payments that need to be made – like for example on oil, from time to time on defense, the normal private sector payments which need to be made. Those are going through and export selling is not really there in the same quantum. Q: We understand that every time that 54 mark is hit on the rupee, the RBI comes and intervenes but the fundamental problems for the rupee still exist. What would be a natural equilibrium that we could see for the rupee or an average that we could work with considering there are fundamental problems without an RBI intervention?
A: I would not really like to have a particular target as such. It is fairly natural for a currency which is a deficit currency to weaken in an uncertain environment. I would say the role that probably the government or the RBI could play would be to reduce this deficit as much as possible. It has blown out over the last couple of years. Maybe some fundamental reforms are required. The RBI may look at particular classes of imports etc which are chunky and may see if something can be done at the time of crisis tied over some of the payments etc.
The way they have been looking at the export side and they have recently asked exporters to liquidate 50% of EEFC balances. I would think the role that would be played on a fundamental basis would be more to try and see how the deficit could be reduced as much as possible. Secondly, to try and get some flows into the market the way they have asked exporters to sell 50% of EEFC which are otherwise not coming through.