Punishing taxes may bring rupee down further

CNBC-TV18's banking editor, Latha Venkatesh, shares her views on the rupee's reaction to a probable roll-back of GAAR and other taxes by the government. Latha points out to other vital factors that might impact the rupee such as the current account deficits.

Below is the edited transcript of Latha’s analysis of the rupee on CNBC-TV18. Q: You mentioned that the rupee has peaked off it’s and it is unlikely that it will cross 54.3 mark or will the rupee cross 54.3 if there is no rollback on some taxes? A: Both of those. If you look at the macroeconomic fundamentals what really impacts the rupee is, whether our imports are more than our exports. Q: Data indicates that the pitch has been deteriorating? A: That cannot be the reason to keep on making the rupee cheaper. That factor works up to a point and what is that point, you measure that by the real effective exchange rate that is the value of the rupee adjusted to inflation level of its trading partners. Currently, the rupee is 12% undervalued compared to 36 trading partners on India and 2% undervalued compared to 6 trading partners. In the past, whenever we reach this level of undervaluation, normally, the rupee fall stops. This same happened in mid-December and during the Lehman period. Q: Going by that logic, there was no need of heavy RBI invention or additional moves which the RBI made today on foreign currency deposit. Clearly, there is a fear that market’s floor will not persist? A: No, macro data may indicate anything, but markets will always overshoot. Market experts believe that the Reserve Bank normally coordinate its massive efforts when the macroeconomic data is in its favour.
The rupee undervaluation had come up to that point that it make more sense to intervene more massively with policy and dollars at such a juncture rather than waste those dollars at another point. It’s a coordinated effort, but for the days to come certainly there will be more policy initiatives needed primarily to stop an indiscriminate use of fuel because they are not paying the right price. Q: Cues from North Block indicate that chances of rollback on taxes or GAAR will not happen. Do you see the rupee fall further? A: If the government seriously disappoints, that is the uncertainty continues or there is a punishing tax, then there are chances that the rupee will fall further.