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4 hours ago
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"The selling equity is a different phenomenon. It is a function of different set of parameters, but at least on the currency side if we can reduce our overvaluation, then that reduces the incentive for people to take out money in dollar terms. So, I think that is what has happened over the last one month or so where the rupee has depreciated," says B Prasanna, ICICI Bank.
What do you make of it? 90 on the rupee, possible in the next six-eight months?
B Prasanna: No, I do not think 90 is a possibility, but of course you can never say never in markets. I mean, there is a probabilistic scenario in which it could be possible, but our house view is not of 90 happening anytime soon. We do feel that what is happening over the last one month or so is a kind of a catch-up depreciation that is happening on the INR. If you really see in the last quarter, the dollar index has appreciated close to 8%, but the INR kind of depreciated only by 2.1%. Whereas in the last month, the dollar index has appreciated by 1%, whereas the INR has depreciated by slightly more than that. So, I would say that it is kind of a catch-up depreciation of what did not happen in the first three months ever since the Trump trade started.
The other thing, of course, is and we have been chatting about this consistently as well, what can the RBI do? What tools do they have at their hands and whether that will really work or not?
B Prasanna: So, the rupee has been held a little too strong on a relative basis. If you look at the INR against most of the other currencies, it has appreciated because the other currencies have all depreciated much more against the dollar. So, what we are really seeing is the dollar strength which is going on. So, to some extent there has been a change in the way RBI is approaching it in the last one month or so and I would say that this depreciation of the INR is a part of that strategy.
RBI should do more of that if the dollar is appreciating because of a global force, then they should kind of let it depreciate a little. Yes, they might want to come in and stymie a little bit of volatility, but then if there is a trend depreciation, they should let the rupee depreciate, that is one. Second thing is they have sucked out a lot of liquidity from the banking system on account of all those interventions that they have done over the last three-four months. The loss of liquidity is almost to the close of four lakh crores over the last three-four months.
So, they did do the CRR cut, which gave around 1.2 lakh crores to the system. They need to do more of that. They need to do more of liquidity infusion and they have a couple of tools available at their disposal.
They are already started to do a lot of buy-sell swaps in the forex market. They should continue with that to the extent it is possible, to the extent the market is liquid they can do that. They should also maybe explore about another CRR cut to the extent that it gives you more liquidity into the banking system, and at some time also think about open market purchases of bonds to give in liquidity. So, let the rupee depreciate, give more liquidity in INR terms, and also consider a rate cut in the February policy.
In their wisdom, of course, they will decide whether it is appropriate or not, but the fact that growth has slowed down and the only thing if at all that is possibly going against a rate cut is this strength of the dollar and the weakness in the INR, but if you were to convince yourself that the strength of the dollar is more like a global phenomenon and the INR is not depreciating on account of any weakness in CAD per se, current account deposit is still pretty okay, then a case can be made for a rate cut to support growth. So, I guess, let the rupee depreciate, give more liquidity, and cut rates is the prognosis that the Reserve Bank could possibly be doing.
But the rupee depreciation will have larger implications and not just export-import in the sense of fiscal deficit and trade deficit and whatnot. Do you think all of that would be okay if we continue depreciating or that could raise red flags or concerns at the macro level as well?
B Prasanna: No, I mean, if at all there is a macro concern that can arise out of a depreciating rupee, it would be more from inflation perspective as to whether a depreciating INR is importing inflation from the rest of the world into India. But from that perspective, thankfully, we have a core inflation which is really going down, WPI which is much-much lesser, and we have Chinese goods into the global markets which is at much lower prices and hence, there seems to be no fear of an impending rise in inflation.
And on top of it, you also have oil price increase not really passing on to the Indian inflation because of the pump prices being kind of having still a cushion.
So yes, there will be a 15-20 basis point impact of a 5% depreciation of the INR on inflation, but I do not think that is something that we need to worry about from a macro perspective. I do not think it really affects fiscal. If the rupee depreciates, it might actually make the current account deficit a little bit better on account of the export competitiveness for some of the goods. But also bear in mind, capital flows are as important and when you have a very overvalued INR which it was maybe a month ago before the current bout of depreciation happened, capital flows were not coming in and instead, it was actually going out and people were selling equity and then taking money out.
Of course, the selling equity is a different phenomenon. It is a function of different set of parameters, but at least on the currency side if we can reduce our overvaluation, then that reduces the incentive for people to take out money in dollar terms. So, I think that is what has happened over the last one month or so where the rupee has depreciated.
English (US)