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Require permanent capital flows to cover current account deficit, says Ananth Narayan

Require permanent capital flows to cover current account deficit, says Ananth Narayan

Require permanent capital flows to cover current account deficit, says Ananth Narayan
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By CNBC-TV18 May 17, 2018 6:31:49 AM IST (Updated)

"The reality is we do require permanent capital flows to cover our current account deficit – that can come in the form of FDI and that can come in the form of maybe FPI in equity,” said Ananth Narayan, Professor of Finance at SPJIMR.

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The rupee has touched a 15-month high.
The correction in the rupee will continue and this is a healthy correction for the currency, said Narayan.
“Over the next few weeks and months we could touch 70/USD and as I said it’s not a bad thing to happen,” he added.
He further said that rupee touching 70 per US dollar will be good for exports and competitiveness.
Reserve Bank of India (RBI) has enough reserves to take care of an eventuality, said Narayan.
Edited Excerpts:
Latha: Rupee is already at 68.10 and now we are waking up to slightly harder macros, both dollar index and US bonds, how worse can it get before it becomes profitable to sell the dollar, is it 68.50, is it 68.25?
There is probably still some room to go. Today, we might not see a large reaction given that we have already seen some reaction over the last few days. Market will probably open at about 68.10-68.15 again and not very much higher from last evenings close. At the same time the trend is pretty clear.
The onshore demand has been surprisingly high in the last few days for dollars. Given that, our permanent flows have now become negative with a high current account deficit and that has got people who are sitting with long rupee positions pretty nervous as well, especially in the offshore market.
This nervousness will continue and this correction in rupee therefore can continue. However it is not a bad thing, the real exchange rate (RER) has come down from 121 levels to about 115 now and it has probably room to go down even further.
While a headline of 69 or 70 might cause some panic or alarm, it actually is probably a healthy correction for us in the short term.
Latha: Would 68.50 look psychologically good enough or can it go to 69 which would be a new low for the rupee?
I would even go further, over the next few weeks and months, we could touch 70 as well and as I said it is not a bad thing to happen.
I went through the trade data as well and the current trend that we are seeing right now is that the transient positions are coming off, people who are sitting with long speculative rupee positions are getting out.
Hopefully, rupee will depreciate to a level where more permanent flows will improve. Economists always argue that exports don't change much with dollar-rupee but at least imports can come down if nothing else.
We can stop importing trinkets from China and start to make for India. I do think rupee at 70 for instance over the next three months or six months will help permanent flows into the country improve. This has been a long standing demand for our trade and for manufacturing as well and will help to reduce all these speculative positions which are causing all this pain. So, it is not a bad thing to happen.
The risk is, who is to control the size of the moves? If oil was to go to $90 or $100 per barrel then what looks like a nice controlled move can become a panic at some stage.
That is where Reserve Bank of India's operational expertise will be tested over time. They have enough reserves and enough policy instruments to take care of any eventuality but how much confidence and how they manage the communication and intervention will be something which could be tested over time.
Sonia: Normally when US yields harden they impact the overseas flows into emerging markets, you think this time there could be a big impact on the Indian debt market?
I think there could be an impact. The reality is we do require permanent capital flows to cover our current account deficit, that can come in the form of FDI and that can come in the form of maybe FDI and equity. As your US yields, not just the 10-year yields which is the headline which everyone looks at, but the one year LIBOR is now close to 2.8% and that is a pretty high number.
Funding costs have gone up dramatically by over 100 basis points in the last one year, that will impact the flow of capital into emerging market countries including India which given the oil price movement is seen as vulnerable.
Unfortunately, we are being clubbed with the vulnerable countries again, it is almost like a throwback to 2013. If oil was to go to $100 per barrel and beyond, we sure will be called fragile all over again. So, it is a tricky situation for us however it is too early for us to even think about panicking. It is all fine so far and this could actually be good for us in the medium term.
Latha: So, 8% we stop there - the 10-year?
The reality is the Indian banks are still staying out of the markets which means every auction could potentially see us pushing the envelope and pushing the edge on yields. It is kind of ridiculous the way market is reacting right now.
It is high time that this technical issue of market participation be brought under control. Between the RBI and the market participants there has got to be some dialogue which resolves this otherwise 8 percent looks like a good yield to stop at unless oil starts to go even higher from here and 8% already factors in a lot of bad news including rate hikes.
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