Wednesday, May 9, 2012

RBI, help avoid stampede

Rupee is under pressure, yet again.  RBI made FCNR deposits more attractive by pushing up the interest rate caps and left it to banks to decide the interest rates on PCFC (packing credit in foreign currency).  Also government delayed controversial tax rules for foreign investors (GAAR) by a year. Indian equity and currency markets were euphoric but it was short lived.  

Recent happenings in Euro region has affected global risk sentiment heavily.  Uncertainty in formation of Government after voters in France and Greece voted out their governments in the recent election to indicate their unhappiness over ongoing austerity measures is the latest in the list of euro region's debt woes.

This, added to our own high interest rate regime, lack of fresh investments, ever widening current account deficit and negative balance of payment, is not painting a pretty picture.  Corporates that I have been speaking to are yet to see reduction in interest rate of their borrowings. Benefits of CRR and Repo rate cuts so far this year are yet to reach customers' pockets.  

Spiralling dollar against rupee is further worsening balance of payment hence investor sentiment.  In the absence of foreign capital flowing in, rupee would remain under pressure making the vicious cycle more complex and painful.

These are economic issues that we have been living with for sometime now and will get over them sooner than later.  What really worries me is RBI speak.  Yesterday we have had a very senior RBI official say "RBI is conscious of the extreme volatility in the rupee exchange rate and has a variety of tools to guard against such fluctuations" but also said " RBI's role in protecting the rupee's slide is limited".  Foreign investors sold close to a billion dollar (net) yesterday alone.  

We believe (1) RBI has reasonable fire power to intervene in FX markets and (2) Rupee will continue to be under pressure given the global and domestic realities and (3) Government needs to do a lot more to ensure RBI's slew of measures is successful.  However what is completely within RBI's control is to maintain its credibility.  As we have seen yesterday, late last year and in earlier instances, statements from RBI could cause wild movement in Rupee.  In this (what almost seems like) an inevitable one way street, what we could certainly do without is, a stampede. Silence is Golden?!

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