0 The Indian rupee started the day below the Rs 54 mark and is now around Rs 54.21 levels. There has been a sense of shock in the currency market for the last few months, said Anant Narayan, managing director and regional head of fixed income and currency trading of South Asia at Standard Chartered Bank.
According to Narayan, the Reserve Bank of India (RBI) has enough firepower to restrict the downside. However, he clarified that the central bank is reticent about intervening aggressively. "The markets are looking at RBI for steps to rein in volatility," he added.
Narayan feels the current account deficit remains a key concern now. He believes the rupee isn't sacrosanct at any level at this moment. The RBI should now start focusing on the growth, he added.
Here is the edited transcript of his interview to CNBC-TV18. Also watch the accompanying videos.
Q: What are you staring at now from this level of Rs 54.25 levels?
A: It has been a state of shock for the last few months, not just this morning. We have gone down 25% in a short time and the rest of Asia hasn?t reacted the same way.
The move has been so sharp that the market is looking forward towards the authorities, particularly the RBI, to come up with some kind of steps which can arrest the short-term haemorrhage.
In the medium and long-run, we can question whether the RBI can control this on an ongoing basis for several years given the current account deficit, but we have more than ample ammunition to handle any short-term crises with USD 300 billon of reserves.
It?s the time for them to flex some of that buy the time required so that some structural changes can be made and bring growth back to the track, which will bring in money all over again.
Q: Are you seeing any signs of that? They tired once when the rupee last went to Rs 52.70 levels and it worked for a few days, but eventually we took that low out and we have gone well pass that. Will this keep the RBI aware that it?s stepping in or its interventions will have some kind of temporary impact because of the strong momentum?
A: The data or intervention comes with a lag. The data relating to the previous crisis of 2008-2009, at that time the reserves dipped by USD 50-55 billion.
A substantial intervention was done to the tune of 15-20% of the reserves. That kind of size hasn?t happened as yet. The RBI has been probably a lot more reticent about the actual intervention process.
Given the size of the move, it?s only a matter of time before the RBI decides to step in for real earnest. Though this rupee move is shocking, it is good for the country in the long-run.
It sounds strange to say that when we have so many macro and micro problems staring at us in the face, but hopefully this will spur the next set of reforms that we need to make India the target of foreign capital all over again.
What worked the last 20 years in terms of opening of markets, FII money and software sector might not last us in good stead going forward. We need a new set of reforms to happen.
RBI has to ponder a lot more and be a lot more deliberate in its actions. Given the size of the move, it will eventually come in. Tomorrow is the mid-quarter review of the policy, which might be a good time to start.
Even if it doesn?t happen tomorrow, the RBI has enough taps to open and enough muscles to flex to control the market in the short-term.
Q: Having broken through so many of these levels, is there any sacrosanct level that you are watching or is it a one way street for the moment?
A: There is no level at all. There is a mismatch in supply and demand. The sharp move of 25% will keep exporters away and importers nervous. The market is extremely conscious about the fact that if we were to see intervention of a strong nature, we could equally see a pullback which is quite sharp.
As much as Rs 2-3 coming down in a short period of time from 55-54 levels to 51 levels cannot be ruled out because the move itself has been so sharp. In the short run, the RBI can control this situation the best.
They have the wherewithal and the ammunition to do so. Hopefully, this will buy us the time to make reforms in terms of bringing growth back to focus.
Q: What are your expectations from the policy tomorrow?
A: We would like to see a shift towards growth. The IIP data has been -5%, the GDP has been 6.9% for the Q2, the capex is floundering and there are definite signs of a slowdown. The growth story for India is clearly at risk at the moment.
A lot of commentators are calling for rate cuts the next year in 2012 between 100-150 bps. I would like to see a shift towards it right away given the fact that growth has to be brought into focus, not just for the rupee, but also for the larger economy as a whole.
I would love to see a CRR cut or a rate cut. Given the practical difficulties of inflation still being above 9% and repeated statements from the RBI keeping inflation as prime focus, we would probably see an indication of an OMO calendar buyback to ease some of the current liquidity issues.
As early as early next year, we might see a change in monetary policy stance and eventual rate cuts and CRR cuts coming through to give some fillip to growth in the economy.
On the rupee side, there could be some steps as well in terms of allowing or removing caps on ECB borrowings and increasing the ceiling on Foreign Currency Non Residential (FCNR) deposit to give the sense that RBI is watching rupee closely. On both fronts, those are the expectations and hopes.
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