The Reserve Bank of India (RBI) may not aggressively increase rate just ot address the falling rupee, said Hitendra Dave, head of global banking and markets, HSBC India.
"So far, the Monetary Policy Committee (MPC) has studiously maintained that they have only one mandate which is inflation targeting 4 percent, plus and minus 2 percent," Dave said.
The RBI is likely to increase the repo rate by 25 basis points in the upcoming monetary policy review as inflation is expected to accelerate further due to higher crude prices and the weakness in rupee. After two successive hikes, the repo rate currently stands at 6.50 percent.
The rupee has come to 73.3 per dollar, do you think this adjustment is enough or do you think it will have to run further lower before it adjusts to the new levels of crude?
All of us have been debating what is the right level of currency and I am sure almost all of us will know the right answer in hindsight but you do have a current situation where India has a famous current account deficit which because the largest reflection of that is oil and every time oil goes higher by $2 per barrel or so, people make their assumptions around the current account and therefore on that they make their assumptions on the amount of the dollar that the country needs, the amount of capital flows coming in or leaving is widely known and therefore further adjustments take place.
The fact that the currency has weakened in this calendar year or so by and large in my view at least is a good thing. I also think it is a good thing that we haven’t followed historical practices of drawing some kind of a red line to say rupee cannot cross this particular number, I think the currency just like stock prices, bond prices and commodity prices has to find its own level which is the equilibrium between buyers and sellers.
Because the currency has a macro impact sometimes the central banks of induvial countries coming in to absorb a lot of dollars or supply a lot of dollars if they believe this is a temporary frictional demand.
Overall, if you have a current account deficit and if you have a balance of payment (BoP) which is largely negative at the current juncture then it is fine for the currency to depreciate.
Some of the noise around this is a bit excessive according to me. This is a healthy and orderly correction and is one of the things which will eventually correct the current account deficit.
The combination of rising oil prices and a depreciating rupee makes quite a deadly cocktail as far as inflation is concerned. So what do you see as the move from the Reserve Bank of India (RBI)? The case for rate hike maybe sort of indisputable, but the question is whether it will be a 25 basis points or a 50 basis points rate hike that we are looking at, what are you pencilling in?
It is a bit more complex in the way you put it, in my mind at least. The fact is the currency and the oil effect have been passed on till as of yesterday (Tuesday).
So whatever realised inflation we have had reflects the fact that oil was, for let us say, the 60 day average of August and September is what we have paid for in September and the currency movement with whatever it was from 68 to 72 per dollar in September has already been reflected in oil price to the extent that the inflation realisations capture that they capture that.
Coming to the policy on the interest rate, it will be interesting to see because so far the Monetary Policy Committee (MPC) has studiously maintained that they have only one mandate which is inflation targeting 4 percent, plus and minus 2 percent.
If you read the minutes of the previous 2-3 meetings, I think a word rupee hardly got uttered by any of the members. RBI has actually clarified that their only mandate they look at is inflation. If they still maintain that position then they have to go by realised inflation and the expected inflation taking into account the factors that you have mentioned rupee, oil and other factors that use oil as an input and to the extent that there could be higher inflation projection and that could be a reason to hike interest rates.
In my own view, the recent experience at least of central banks that have hiked interest rates very overtly to defend the currencies has not been particularly great. I am sure RBI is aware of that. We also have an economy where the import component of the GDP is relatively small by other economy standards.
I would question the merits of slowing down the entire 80-90 percent of the economy which is not using imported goods to address just one variable which is a rupee and where the interest rates defends thus far at least has not turned out to be a great example even in the Asian context.
Since you track the equity market action as well your thoughts on the kind of volatility that we are seeing whether it is going to be the new normal. This year we will have the big state elections as well?
I am not sure, I am no expert on the election part of it at all. So, I won’t talk abou it. But you have a situation where a lot of people on your channel, people who are experts in stock market, have been saying that some of the stocks had gone into euphoric zone.
They were projecting growth rates forever and forever into the future. Whether the fall is a reflection of some of that re-assessment, whether it is a re-assessment of certain business models and all those things.
We always know that in an emerging markets on the way up it is very easy, on the way down the window becomes narrower and narrower when it comes to moving. I am sure there is a massive amount of leverage in many of the midcap stocks as in high net worth individuals and other individuals who borrowed to participating in the stock markets so on the way down obviously triggers get kicked in much more sooner.
I don’t really have a sense that on individual stocks per se, but my sense of the economy is that despite all the negativity on the macro, oil prices, potential inflation, rupee-dollar, the sense I get at least from the vantage where I sit is that the economy is actually doing quite well.
To the extent that it is doing well on the back of relatively strong consumer balance sheets and consumption demands been quite strong. Recently, the consumption demand being met not only through savings and incomes but also through a leverage which was available relatively easily I think those factors really haven’t gone away at all. So, I would be a little wary of coming to a conclusion on the macro simply based on the market movements.
Markets can sometimes be right, can sometimes be wrong, can sometimes give you misleading signals. So per se I can comment that the economy at least through the corporate world that I speak to is doing quite well.
You are quite intimately connected with the debt market. Is the fragility getting repaired, after all it was a big move trying to ring fence the IL&FS problem, we don’t know if it is ring fenced. We only know there is a leadership in place, how fragile is the debt market and should we still worry?
The situation is such is that I think there is a nervous calm which has returned to the market. I don’t think it is business as usual, but I also don’t think it is as bad as it was seen about 10 days back or so.
Right now all stake holders in the system will need to do a little bit more than what they have historically been used to so. If I am heading any of the effected companies I would suggest that those companies need to re-win the confidence of the market.
They should come out with their quarterly results soonest, come out with disclosures that are best in class, much higher than what they have done in the past. If there are question marks around the composition of their asset book disclose how much is wholesale loan, disclose how much is mortgages, disclose how much is mortgages in individual size buckets. Disclose what are the seasoning of those size buckets and so and so forth.
The government has done a great job by moving relatively swiftly on IL&FS. I am sure IL&FS new board will be seize of the matter. I would think the best thing is to have transparency out there. Let us not keep debating is Rs 90,000 crore a liability backed by only Rs 50,000 crore of assets, Rs 60,000 crore of assets, just put it out there.
Once you put it out there then the size becomes known, then everyone can know what the real whole is. My guess is transparency by issuers, transparency by companies is in trouble, even transparencies by the financial market; I don’t know why we don’t have daily data on how much CPs are being issued every day.
How many NCDs are being issued every day, how many secondary market trades are taking place on a as close to live basis as possible because in the absence of this openness and transparency I have seen a lot of misinformation bordering on rumour mongering, masquerading as analysis actually.
So you do need to be sort of separating the truth from the chaff and also we shouldn’t forget that simply because some stocks have fallen down or some models are being questioned, many of these companies perform real economic purpose.
They have made sure that 100s of 1000s of people own houses or 100s of 1000s people own cars or two-wheelers or mobiles phones or whatever else. So, the model has served a purpose. Yes, the recent events do they tell you to re-asses the riskiness to the PE multiplies to the growth potential that is there, that happens to every sector. But we shouldn’t say that this was just a phantom business. That is not the case at all.
I really think some of the misinformation masquerading as analysis really needs to be corrected and the only ones who can do it is stakeholders, market participants, companies involved and clearly the regulators have done a really good job.
Subsequent action by RBI in the form of LCR and the OMO calendar and linking it directly back to recent market developments, I think some large public sector banks confirming that they are open for business to NBFCs these are good measures. But we shouldn’t think that the problem is over. I think watching it closely would be the best thing that we can do.
First Published: IST