Government Should Let The Rupee Fall Further, Says Ananth Narayan

Mangalore Today News Network

New Delhi, Jul 07, 2018 : A drop in the rupee only goes to aid exports, a key parameter which can help lower the current account deficit. That’s according to Ananth Narayan of SP Jain Institute. He said the domestic currency is still overvalued and a further depreciation shouldn’t be a cause of concern.

 

“The rupee is still overvalued in real effective exchange rate terms by about 15 percent, and maybe, we should let the rupee relax a little bit more so that the balance becomes more sustainable,” Narayan told BloombergQuint in an interview.

The domestic currency fell 8 paise to trade at 69.03 against the U.S. dollar in early trade today on appreciation of the greenback overseas and sustained foreign capital outflows. This is the rupee’s third straight slide, which dealers said is mostly due to demand for the American currency and a lower opening in the domestic equity market. Yesterday, the rupee tumbled 21 paise to a fresh closing low of 68.95. The Indian currency is the worst performer among Asian peers so far this year. Narayan said there’s still room to let it depreciate.

“The dollar-rupee should be at 71-72 and its not a cause of alarm,” Narayan said.

There is a problem on the external front. We have a precarious balance. Our current account deficit for this fiscal year will likely be the worst than it’s been in the last six years at about $70 billion. Our FDI will not cover that permanent outflow, which means we need to borrow money. We already have seen the RBI intervene regularly to stop these flows. In fact, the permanent flows will be about $3 billion of outflow every month. To add to our problems, rather than flows coming in to bridge the gap, we are actually seeing reversals of hitherto put on carry positions. Putting together, it is not looking great.

I think one good news for the rupee is that the RBI still has plenty of reserves. They probably sold about $25 billion since April but they still have about $400 billion of reserves left and the chances are that the government, particularly in an election year, will not want to see the rupee depreciate too much and too rapidly. So they are still holding on to their guns. Second, the weakening rupee might improve the current account over the course of the year, exports should do better, not just because of the rupee but also because of the goods and services tax and demonetisation impact fading away. We may start to import and splurge less on smartphones from China with the rupee weakening, but nevertheless the problems remain. Frankly speaking, the rupee is still overvalued in real effective exchange rate terms by about 15 percent and may be we should let the rupee relax a little bit more so that the balance becomes a lot more sustainable.

That seems to be the view coming in the from the government as well. In the last week or so, we have heard Rajiv Kumar of NITI Aayog as well as Arvind Subramanian suggesting that a depreciating rupee is not a cause of concern and further depreciation would not be a cause of concern. How are you interpreting what they say, combined with the RBI action which i know is more to smooth out volatility than to defend it necessarily. But at what point do you see them wanting to defend? There are estimates of rupee moving to 70 or 72. Do you think those are realistic in any fashion ?

On the government front, I must admit I am confused. NITI Aayog and the outgoing CEA did talk about allowing the rupee to weaken. Finance Minister Piyush Goyal is a rupee bull. I don’t think he wants the rupee to weaken. More importantly, real politics dictates that in an election year, a headline of rupee weakness in a country which unfortunately associates the strength of the rupee with economic prowess. Plus the fact that it will immediately impact our petrol and diesel prices will likely make the government not wanting the rupee to depreciate too much notwithstanding what Mr. Rajiv Kumar said. So, I still believe that the pressure on the RBI from North Block or from Delhi would be to try and keep a lid on the rupee depreciation, which is kind of sad because on the one hand we have these sensational headlines about 70 and 72.

Frankly, the rupee at 70 is still overvalued. At 69, we are 15 percent overvalued, at 70, we would be 12.5 or 13 percent overvalued. So given the fact that the world has moved on and we have a differential growth where India grows faster, has a higher inflation than the rest of the world and our balance has moved against us, we are clearly having trouble with our exports, we are importing too much and our FDI is not growing fast enough to keep pace with this deteriorating trade balance. It’s a natural adjustment mechanism to allow things to fall into balance. It is not a question of national pride or just looking at the dollar-rupee in isolation, this is simple economic balance. If left to me, the dollar-rupee should be at 71-72, it’s not a cause of alarm, it’s not a runaway fall by any means, it’s an adjustment process which hopefully allows us to build a more sustainable external balance.

 

 

courtesy:yahoo