Cut dollar demand by PSU, buillion: IndusInd Bank

In the backdrop of the rupee depreciating to 53, Moses Harding of IndusInd Bank told CNBC-TV18, attributed the fall to the structural problems in the current account deficit and fading positive investor sentiment.

Moses Harding called for removal of the dollar demand for bullion, the dollar demand from PSUs and divert it through RBI for better capability in order to control the exchange rate movement. Below is an edited transcript of the interview on CNBC-TV18. Also watch the accompanying video. Q: What do you think of the depreciation in the rupee at 53.41? Where do you see it headed now?
A: The near-term outlook is definitely bearish. We all know that there is a structural problem in the current account deficit and that there is no quick solution to it. Till then we need to maintain the offshore flows into the capital account.
There has to be a sign of a 'feel good' factor and positive sentiment in the minds of offshore investors - FII and FDI. After the Budget there has been some negative sentiment in the investors due to tax-related issues.
Till that worry is out of the way, FIIs are in a wait –and-watch mode and this is already being reflected in the equity markets. So now it is important for the RBI to prevent rupee’s weakness go beyond 54.30 - the level on December 16 before the RBI came out with most stringent rate-cuts.
So, the immediate focus is on 54.30 and all eyes are on RBI and how it is going to prevent any fall beyond 54.30. Q: In terms of real effective exchange rate, we seem to have pretty much discounted the deficit, isn't it? Will there be still more downsides?
A: The problem is that despite consolidation in the dollar index and high forward premium, the spot rupee is weak. So that highlights the very strong bearish momentum. The dollar slided above 80 and came all the way back below 78.5 - that has not been factored in the Indian rupee.
Forward premium continues to remain high keeping the forward looking market in a supply driven mode - that does not cap the factor in the spot rupee.
So given the absence of traction of spot rupee with these two strong bullish rupee factors, I think the capital account flow becomes the top priority. Unless they get a quick resolution to the futures, I think rupee will be under pressure.
The next important factor is when things are bad, oil PSUs come in a hurry to cover. I think the RBI needs to address that. Probably the next immediate step can be to route the oil-dollar demand through RBI so that it can come in whenever the market reaches stability. Q: Did the RBI provide support at any level for the rupee today?
A: The RBI has been selling and it will continue to sell all the way to 54.30 and beyond that. I think there maybe some announcement so as to remove the bearish pressure. The immediate action would be to cut the dollar demand from the PSUs into the market. Q: You expect such an announcement after 54.40, isn't it?
A: That is exactly what is happening. They are buying and RBI is selling but it has had no effect so far. So it is better that they remove the dollar demand for bullion, the dollar demand from PSUs and divert through RBI for better capability to control the exchange rate movement. Q; There are no other tools left isn't it? We have pretty much run through NRI interest rate, deregulation; maybe something on FCNRB is possible?
A: FCNRB can add to rupee liquidity, but I don't think it can add to the dollar.