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RBI policy pragmatic, but its impact on exchange rate uncertain: AV Rajwade, AV Rajwade & Co

The policy has shown a practical approach, but it is not certain if can have any sizeable impact on the exchange rate front, says AV Rajwade.

ET Now|
Updated: Jun 04, 2014, 04.44 PM IST
Indian rupee’s volatility: Experts’ views

In a chat with ET Now, AV Rajwade, Director, AV Rajwade & Co, shares his views on the rupee and the possible impact of the RBI’s monetary policy on the markets. Excerpts:

ET Now: We would like to have your opinion on the rupee. What do you think is going to be the next trigger, because most people are of the view that we are not likely to see any depreciation in the currency any time soon?

AV Rajwade: Not really. The RBI under governor Raghuram Rajan has succeeded in reducing the volatility in the market. They have done reasonably well there. I have doubts as to whether the volatility has been reduced to a reasonable level, because the central bank’s own revised CPI-based index suggests that the rupee is significantly overvalued. Given that overvaluation and the fact that even after gold imports have come down, our trade deficit is still at $150 billion, which is 7-8% of GDP. There is a cause for concern. Also, given that inflation in India remains much higher than most of our trade partners, it is not advisable to feel complacent about the current level of exchange rate. This is not the ideal situation if the objective is to spur growth. More importantly, employment generation, which has to be the first priority over everything else, has not reached the desired level.

The monetary policy has been very pragmatic, considering the status quo in the rate and the reduction in the SLR. I am not sure that the measures taken on the foreign exchange side — derivatives regulations for trading, derivatives for FIIs and remittances by resident Indians have been increased — are going to have any effect on the exchange rate.

Mythili Bhusnurmath: You spoke about the measures that the RBI has taken on the forex front. You said that there was not going to be much of a difference on the exchange traded currency derivatives front. But talking of the additional leeway given to foreign portfolio investor, will that not increase the volumes in the currency derivates market? Should that not lead to better price discovery?

AV Rajwade: To an extent, yes. But only to a very marginal extent. Because the limit —$10 million — is still very small. Another point pertains to how hassle-free it is going to be. Let us accept one thing that the FIIs — whatever hedging or speculation they wanted to do in terms of the exchange rate — have been doing it in the Dubai stock market where the rupee-dollar futures contract has been traded for many years now. The volumes have gone up very sharply in the last year or two.

They also have the NDF, the non-deliverable forwards market, which is also very liquid and has been active in Singapore, Hong Kong and London lately. It isn’t that this facility was not there for the FIIs. They have already had those facilities, that too in the markets that are free of any regulatory problems. So, I am not too sure how much the new move is going to impact the situation.

Mythili Bhusnurmath: Are you equally sceptical about the hike in the liberalised remittance scheme from $75000 to $125,000? Will that also not make any difference at all really?

AV Rajwade: At the macro level, probably no. Let us look at what the possible impact could be. Now $125,000 is roughly Rs 1 crore. Now in India, how many are such people who can afford to remit Rs 1 crore outside the country? Another important point is, how many of them would utilise that facility to the full extent?

At the macro level, the total count — including total imports, exports and other flows in the market — is probably of the order of a trillion dollars. How much difference is that going to make in terms of the demand-supply balance? Frankly, I am not too hopeful that it is a step which will be significant in terms of affecting the exchange rate.

Mythili Bhusnurmath: How do you view the reduction to the export refinance limit at a time when you really need to incentivise exports? Is this the right thing to do merely because the Urjit Patel Committee had recommended doing away with sector-specific refinance?

AV Rajwade: I do not think that it is a major step in any case. Let us also accept that for the exporter, the economics of exports — the exchange rate — is far more important than the interest rate. After all, for most companies the interest cost is not more than 2% or 3% of their total cost of production. A marginal change in it because of the changes in refinance will not make much difference to the total cost. In fact, in a single day, an exchange rate change can more than wipe out the benefits of any change in terms of the interest rate structure.

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