Ananth Narayan, Money Market Expert tells ET Now that if the bad news continues, the oil prices go up further and the global sentiment continues to remain soft, then market will take rupee to 70 plus.
Indian rupee is the worst performing currency in 2018 as far as Asia goes. And do you think that the US putting India on the watch list is going to stop RBI from intervening? It always says that it does not intervene but a lot of times, the data shows otherwise?
We have a basic problem as far as the rupee is concerned. Our fundamental balance of the current account deficit and the net FDI has been turning adverse for the last few quarters. In fact, the last fiscal, there was a $20 billion deficit which means our core flows had turned deficit and this year going forward it looks like it will be an even larger deficit of about $35 billion.
That tells you that across current account deficit and FDI, we are losing $3 billion every month and we need to make that good by borrowing money from elsewhere. Now, there are multiple problems here; one is that within the current account deficit itself, there are clearly issues on exports, gems and jewellers, textiles and readymade garments. A lot of sectors are underperforming.
On imports, it is just not oil, it is also gold, smartphones and electronics. Frankly, the entire structure tells us there are some basic issues on the domestic industry and the external front which need to be addressed. While we lament the fact that rupee is depreciating and our holidays are getting more expensive, it is not a bad thing for the country as a whole. If rupee was actually to depreciate and give our domestic industry a chance to do better on exports and to reduce our imports, we have to find a way of producing our own smartphones.
Given the nature of the balance, the global context and since we still have more issues coming up, including sanctions against Iran oil, a lot will depend on where RBI comes in to stem the rot. The saving grace is they have plenty of reserves to make do without flows right now but we do have a problem of basic flows being negative. Plus some of the flows which came in the past, including FDI in debt, NRE deposits and exporter selling is now reversing. So, they do have a lot of outflows to contend with.
Do you believe that rupee will depreciate further from here on or do you think it will now be in a range after this depreciation?
If we did not have RBI intervening in the markets, we would be depreciating and we would actually be catching up with the rest of the currencies. Let us not forget that 2017 was a very good year for the rupee where we outperformed all currencies. Even today after all the depreciation, our real effective exchange rate shows we are 15% over valued which means we have more room to correct.
That correction might actually help our current account deficit and domestic industry improve going forward. Having said that, the RBI intervened quite strongly to stem the rupee rot, from April this year. In April, they intervenes to the extent of about $7 billion.. We do not know the numbers for May and June but I suspect that number is an excess of $15 billion cumulative which means they have been stemming the rot.
There is also a political angle to this given this is an election year, a headline of rupee at 70 plus will not look good. Also it will hit us immediately at the petrol pump and for our diesel prices, etc. It is quite possible that an overall pressure would be on keeping a lid on the rupee. If the bad news continues and if oil prices go up further and if the global sentiment continues to remain soft, then the market will take rupee to 70 plus.