The RBI has restricted the net end of day open positions and the intraday open positions that banks can carry. The central bank has also restricted the extent to which importers and exporters can punt in and out of dollars on the basis of their expected earnings.
In an interview to CNBC-TV18, Moses Harding, executive vice president of IndusInd Bank says, this move was not a surprise.
He further says, rupee weakness beyond 54 is very bad for the economy. According to him, 51 is a fair value. "51 to 54 is a right level till the RBI sorts out inflation."
Below is the edited transcript of his interview on CNBC-TV18. Also watch the accompanying video.
Q: What do you suspect is going to be the impact? Will we see a rupee appreciation tomorrow?
A: This move was not a surprise because RBI has abutted almost all its ammunition. Their intervention was ineffective in a highly demand driven market. So, RBI has to cut is demand side through fixtures and FX operations.
They have done three things. The foreign institutional investor (FII) thing is almost liquidity neutral. The most important is the impact on the exporters. Exporters who have sold dollars say at 47-49, they have a chance to exit that 53-54 and re-enter at 56-58. That?s not possible anymore. So, to that extent that would be capping the demand.
Structurally most importers are uncovered and exporters are largely covered. That means we are talking about a big chunk of demand being taken away from the market. I don?t see a great impact on the net open positions.
Most of the PSU banks don?t use it. Largely credit and foreign banks use it. Stopping exporters from cancellation on rebooking is a major impact.
Q: How will the rupee trade tomorrow?
A: This reversal is from three grounds. One is stability in Euro dollar on 1.30 and Nifty stability around 4,700. More importantly, the sharp spike in premium, we have got a three month premium at Re 1.That brought in supply in the short run. So, when the supply became neutral, the flows become neutral, RBI was a bit effective today.
Given these fixtures on asset operation, I think now 54 is toppish. I think we are getting into a 52-54 level. Fundamentally, rupee is still in a bearish mode.
Q: Would you say that at current levels of 53.60 practically all the overvaluation is over?
A: Ideally rupee weakness beyond 54 is very bad for the economy. That pushes economy into low growth, high inflation scenario; 51 is a fair value. So, 51 to 54 is a right level till the RBI sorts out inflation.
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