ET NowIn an interview with ET Now, Indranil Pan, Chief Economist, Kotak Mahindra Bank, shares his views on the fall in rupee. Excerpts:
ET Now: Rupee at 56. This is not something that was out of bound, but just the ferocity of the fall in the rupee has probably caught a few people by surprise. They did catch you by surprise as well?
Indranil Pan: To a certain extent, yes. But if you really are following what is happening in the global environment, everything is getting linked to Bernanke’s statement yesterday so far as quantitative easing is concerned. So I am not really sure how the market is looking at the whole issue and I am not really confident if the quantitative easing would be going out immediately or as soon as by September as the market is sort of believing. So to that extent, the rupee is definitely on a depreciation bias and the issue is therefore if the quantitative easing is getting reduced. That itself is a problem in terms of the emerging market flows also which is being reflected by the rupee.
ET Now: The RBI has made it clear that they will only intervene once they see a massive volatility. Would you hazard a guess as to when we are likely to see intervention from the Reserve Bank?
Indranil Pan: The inflation differential that still exists between the two economies, we have an RER at about 106 which means that the rupee anyways was overvalued to a certain extent. So unless there is a significant amount of momentum that comes to the rupee, the RBI would possibly be liking to stay out and I do not think the RBI would be immediately interested in stepping in so long and so forth it is guided also by the global dollar strength. Therefore, there has to be a natural behaviour for the domestic rupee also. So that is one side of the story. Now the second side of the story of course is that the RBI needs to be very careful in the sense that the moment they intervene in the markets, it would obviously also mean a negative bias in terms of the rupee liquidity and we are continuing to see a 1 lakh crore plus in terms of the negativity on the LAF and whether the RBI would be willing to add to that is something that also needs to be factored in.
ET Now: Do you think it was probably just a small trigger that was required and in Asian per se, the data points have not been too bad?
Indranil Pan: Yes, the issue therefore that needs to be really understood for the Asian markets per se and especially when most of the Asian economies are export-led economies even today, the whole factor that needs to be looked at is the overall growth slowdown in the rest of the world, especially the larger economies such as the US and the European region. The European region to be more specific. Now in this whole atmosphere, trade as an engine of growth which was augured some six to eight years back, that has been failing very significantly which necessarily means that the overall growth in the global atmosphere needs to come down.
So any data that comes out in terms of the manufacturing side, whether it is a blip or the moment it is to a certain extent lower than expected, the markets would obviously be reacting, which also tends to say that the markets are like on a knife edge at this point in time in terms of which way the risk in the global financial markets moves.
ET Now: What is the expectation now from the RBI? Do you think that the govt has done enough for the RBI to be more sanguine about future inflation growth dynamics to ease policy?
Indranil Pan: A very difficult question because as you have noted, a lot of things are actually in a much more volatile situation at this point in time. Now for the RBI specifically, yes, the sudden fall in the inflation is something that they would be clearly looking at in terms of having opened up a little bit more room in terms of the accommodation, but let us not forget about the currency depreciation. The momentary factor in the currency depreciation that obviously sets a floor in terms of the way the inflation would be moving. The inflation expectations could possibly once again be changing from that perspective even with the relative fall in the oil prices. The gold price fall has more or less been arrested, but I am not really sure how much of a reduction in the gold imports one can immediately look at.
Trends on the gold import do not really see much softer demand on gold in India. So that is another problem that the RBI would really need to contend with. So for the RBI, I would still expect a 50 basis points repo rate cut from now on and obviously as in the rest of the world incremental data flows would to a large extent determine which way the RBI moves. But pretty much clearly, the next level of challenge for the RBI that is emerging is not on the overall rate cutting dynamics from the repo point of view, but more in terms of trying to address the transmission issues and therefore the liquidity issues. So those are the relatively bigger challenges in front of the RBI at this point in time.
ET Now: Rupee at 56. This is not something that was out of bound, but just the ferocity of the fall in the rupee has probably caught a few people by surprise. They did catch you by surprise as well?
Indranil Pan: To a certain extent, yes. But if you really are following what is happening in the global environment, everything is getting linked to Bernanke’s statement yesterday so far as quantitative easing is concerned. So I am not really sure how the market is looking at the whole issue and I am not really confident if the quantitative easing would be going out immediately or as soon as by September as the market is sort of believing. So to that extent, the rupee is definitely on a depreciation bias and the issue is therefore if the quantitative easing is getting reduced. That itself is a problem in terms of the emerging market flows also which is being reflected by the rupee.
ET Now: The RBI has made it clear that they will only intervene once they see a massive volatility. Would you hazard a guess as to when we are likely to see intervention from the Reserve Bank?
Indranil Pan: The inflation differential that still exists between the two economies, we have an RER at about 106 which means that the rupee anyways was overvalued to a certain extent. So unless there is a significant amount of momentum that comes to the rupee, the RBI would possibly be liking to stay out and I do not think the RBI would be immediately interested in stepping in so long and so forth it is guided also by the global dollar strength. Therefore, there has to be a natural behaviour for the domestic rupee also. So that is one side of the story. Now the second side of the story of course is that the RBI needs to be very careful in the sense that the moment they intervene in the markets, it would obviously also mean a negative bias in terms of the rupee liquidity and we are continuing to see a 1 lakh crore plus in terms of the negativity on the LAF and whether the RBI would be willing to add to that is something that also needs to be factored in.
ET Now: Do you think it was probably just a small trigger that was required and in Asian per se, the data points have not been too bad?
Indranil Pan: Yes, the issue therefore that needs to be really understood for the Asian markets per se and especially when most of the Asian economies are export-led economies even today, the whole factor that needs to be looked at is the overall growth slowdown in the rest of the world, especially the larger economies such as the US and the European region. The European region to be more specific. Now in this whole atmosphere, trade as an engine of growth which was augured some six to eight years back, that has been failing very significantly which necessarily means that the overall growth in the global atmosphere needs to come down.
ET Now: What is the expectation now from the RBI? Do you think that the govt has done enough for the RBI to be more sanguine about future inflation growth dynamics to ease policy?
Indranil Pan: A very difficult question because as you have noted, a lot of things are actually in a much more volatile situation at this point in time. Now for the RBI specifically, yes, the sudden fall in the inflation is something that they would be clearly looking at in terms of having opened up a little bit more room in terms of the accommodation, but let us not forget about the currency depreciation. The momentary factor in the currency depreciation that obviously sets a floor in terms of the way the inflation would be moving. The inflation expectations could possibly once again be changing from that perspective even with the relative fall in the oil prices. The gold price fall has more or less been arrested, but I am not really sure how much of a reduction in the gold imports one can immediately look at.
Trends on the gold import do not really see much softer demand on gold in India. So that is another problem that the RBI would really need to contend with. So for the RBI, I would still expect a 50 basis points repo rate cut from now on and obviously as in the rest of the world incremental data flows would to a large extent determine which way the RBI moves. But pretty much clearly, the next level of challenge for the RBI that is emerging is not on the overall rate cutting dynamics from the repo point of view, but more in terms of trying to address the transmission issues and therefore the liquidity issues. So those are the relatively bigger challenges in front of the RBI at this point in time.
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