This further weakness in the rupee and touching its all-time low levels for today, how do you see this and what is next for rupee actually? Help us understand your analysis because in the last few quarters we are seeing a lot of intervention from the RBI as well. So, where do you see rupee headed and stabilising as well?
Anindya Banerjee: See, the Indian rupee is now subjected to what is happening to almost all Asian currencies, almost all currencies against the US dollar. Because after Trump announced the high tariffs on Canada and Mexico also, he slapped fresh tariffs on China.
The trade war is on and we have been expecting this since the end of last year that we have been arguing that Trump too is going to be very different from Trump one and his America first policy can actually lead to some very decisive actions on the trade war front because he has been very categorical about bringing manufacturing back into us and that can lead to some unpleasant consequences on global trade, so that is the reason why dollar index is almost at 110 and we are seeing the impact on the Indian rupee and we could see some more deposition on the rupee, but RBI is going to be there curbing the volatility. But from what we understand, RBI has done a 5 billion dollar rupee-dollar swap just a few days ago. How much of this action is going to be undermined by this tariff announcement? And do you believe that this tariff impact is just temporary and this RBI’s undertaken action is going to have long standing consequences or do you think the tariffs are going to completely overshadow what the RBI is trying to do here?
Anindya Banerjee: See, every time the RBI sells the US dollar to basically curb the volatility, what happens is it sucks out the Indian rupee liquidity from the banking system. So, in order to keep the liquidity stable, it has to do the swaps or do OMOs or other measures.So, we will keep on seeing such liquidity measures continue because in our opinion the tariff war is not temporary, that is the reason why I said Trump one and Trump two are very different.
He has categorically said that his objective is the mid-term elections and I am talking about the US president and mid-term elections are less than two years away and he wants to bring decisive changes with his America first policy, which means next 12 to 18 months we could see far more actions on tariffs and especially on China, which can actually have a long-lasting impact on global trade and a very positive impact on the US dollar.
So, yes, this intervention from RBI we expect it to continue. And RBI will keep on infusing liquidity in the bank system so that his interventions do not make the liquidity tight.
But you did talk about that there could be some more weakness in the rupee and we could be in for that. Can you help us with some level to watch out for because 87 is what we have already touched. In your analysis, what is the level that you are factoring in, in the worst case scenario? And along with that, how does the global economic condition, such as maybe US interest rates hike or inflation are likely to impact the rupee performance?
Anindya Banerjee: See, in a worst-case scenario, we could see the Indian rupee head towards 88.5 or 89 levels over the next few months because we have to understand Indian rupees is not getting singled out.
In fact, it is the entire pack of currencies which is depreciating against the dollar because dollar is the global reserve currency and whenever there is a flight to safety, people will flock to the US dollar, so that is the overarching theme. Now, as far as the economic impact of this is concerned, the budget has been quite fantastic as far as it focuses on growth, on reforms and also, it talks about the fiscal consolidation.
So, the domestic help is there, but the global situation is going to be challenging, so that is the reason why we could see some more impact on the Indian rupee in the coming months. So, the overall volatility in the financial markets is going to be exceptionally high because of Trump.
What the action ahead is. What do you think India needs to do in terms of its trade policies to try and navigate what is happening with the dollar? And also, we have the MPC announcement coming in this week. Are you expecting some more announcements on the OMO front or anything that could impact what the MPC decision is going to be on Friday?
Anindya Banerjee: We could see more announcement on the liquidity front, whether RBI will cut rates or not, that is a 50-50 because the global situation is challenging and Fed has clearly said that they are on a standby, which means if you cut rates and infuse too much of liquidity, your currency could come under pressure because of the interest rate differential.
Now, as far as the actions on the trade front is concerned, see the America first policy is basically in a nutshell, it talks about deglobalization. So, in a deglobalized environment, every country has to focus on its own internal economy and regional trade, so that will be the overarching theme of India and other countries in the coming quarters and years. So, yes, so that is the overall situation we are looking at.
