You were among the few to predict that the rupee would rise as the market called for depreciation. Is the rally coming to an end?
The way I look at the markets is that they have become more forward-looking than they were 20 or 25 years ago. So, while paying attention to the macroeconomic scenario, you also determine how the rupiah is going to behave given the flows, expected interest rates, upcoming data. My view on the rupee was that, overall, flows determine the rate and there are key elements that are positive for India: stable government, positive macroeconomic environment and interest rates. high real interest. The quality of inflows has also improved over the past two years, with most of it in the form of foreign direct investment. From a tactical point of view, because real interest rates are quite high, the currency becomes even more attractive. This is the reason why, from the beginning of the year when the rupiah was at 66-67, I was at around 62 and I continue to stay at 62. But, technically, I see a 61.20.
Irrespective of global market movements… The important question is: how does US quantitative tightening take shape in September?
If it matters, I think you will start to see good dollar strength and the rupee will reverse course. The 62-62.25 level assumes that until the last quarter of this year there is nothing negative in the global markets.
But the Trump trade is also reversing…
In the end, whether it’s Trump or whether it’s Modi, it makes no difference.
It is ultimately the flow of money. If US dollar liquidity is withdrawn, it will impact all that “so-called” excess liquidity created in emerging markets. This liquidity was created by printing money. If foreign exchange reserves begin to deplete, the excess liquidity will put pressure on cross exchange rates which will begin to underperform. Moreover, in an environment where liquidity is plentiful, all kinds of excesses occur.
There could be a large number of loans, some of which are unhedged. Typically the RBI and the government say “we want a stable rupee because we want to encourage investment” but what is not defined is whether you want a stable INR-USD or whether you want stable exchange rates. So this stability is a matter of optics. A stable rupee-dollar globally defines stability. This is why the rupee against other cross currencies would have been quite volatile, but the rupee against the dollar would have been stable. Thus, the rupee now behaves like a quasi-dollar index.
What can RBI do to manage appreciation when it is already facing cash?
Everyone feels they can control the markets, be it the government or the RBI. We have seen that neither the central banks of the world nor anyone else can control them. If you are in a capital-controlled economy, you have more leeway. But while it helps change the pace, you can’t change the direction.
Given that reserves stand at nearly $400 billion, how much can RBI allow the rupee to appreciate?
This is a choice that RBI must make. It has kept real interest rates high due to inflation fears.
If you keep real interest rates too high, your currency will be overvalued. Additionally, you have positive traits like good macros and a stable government. The problem with this environment is that when your real rates become less attractive, the kind of sudden reaction we will have will be quite phenomenal. Ideally, we should not opt for this situation as it can cause upheaval and gash in the economy. I supported the idea that real rates should not be high.
How much could ‘Make in India’ help the rupiah?
It can be a game changer. If you have a lot of added value here, additional investments will occur on the floor here. This means that companies’ propensity to withdraw money abroad will be reduced. So obviously this is going to be positive for the rupee.
There is excess liquidity in the system. Is it good or bad for the economy?
It depends on the growth cycle you are in. At present, growth is starting in India, even globally it is not growing at an extremely high rate. In this situation, excess liquidity is an impetus for interest rates. It allows you to encourage growth. We are so obsessed with growth, but the population itself is shrinking.
If the rupee appreciated against the dollar, it depreciated against the pound or the euro…
Yes, it’s the optical illusion. USD/INR is stable, but it is volatile against crosses because the dollar is volatile against other currencies. We continue to do internal analysis. Did you know India’s second largest trade deficit is with Switzerland? Even I was surprised when I learned this. It’s because of the gold. China is the largest, followed by Switzerland. Dollar/rupee parity, we should look at your trading partners. We actually posed a question to RBI to find out if they were only looking at the dollar/rupee or against a basket of currencies. They did not answer the question.
During the maturity of the FCNR(B) deposits, there were speculations about stress, but this did not happen. Is there a reflection on how to manage emerging risks?
The world is quite dynamic, if you want to be careful you can be very careful. I think it’s a choice, and that’s where the human minds are. In economics, there is always a way to justify any market action in hindsight.
RBI’s target seems to be changing in terms of the real interest rate…
Yes, if you go completely from excess liquidity to negative liquidity, that will have its own impact on the liquidity premium, but otherwise, if you start seeing 2013-14 when rates started falling, system rates corporate banking had already begun to detach. The RBI was to that extent behind the curve.
We saw overall rates cut in the system by 75 basis points and the RBI reacted with a rate cut of 25 basis points. They can only change the pace, they cannot change the direction. Nobody has control of it.
You had a problem with the rupee symbol. Can you explain that?
If you see the rupee, it has two slashes on the logo, which limits growth. All natural construction has to do with the concept of energy release or energy absorption. Even the pound sign (which incorporates a slash) has a stable base. The only currencies that have lines at the top are the Cuban peso and the INR. Not that these things matter. A normal human mind, busy with day-to-day work, will not notice this and may not feel it is a problem. But if you sit down and apply the natural construction, you can notice it. When you write your name, how you write it makes a difference. The line below can be a support line, but you’re not supposed to cut an alphabet. If you see, the rupee started to depreciate after the sign change.