India’s forex exchange reserves are very close to hitting the $400-billion mark for the first time. It took the Reserve Bank of India about a decade to take the forex kitty close to the $400 billion mark from the $300 billion level.
Jamal Mecklai, CEO at Mecklai Financial Services, tells Bhavik Nair that fund flows were extremely robust before the financial crisis when the forex reserves had reached the $300-billion mark. Mecklai also indicates that if the US Fed starts trimming its balance sheet, India might see some negative impact. Edited excerpts:
How would you describe the last 10 years in terms of forex reserves accumulation?
I think there were lots of ups and downs. If you look at the last 10 years, there was the 2008 financial crisis when the RBI had to spend a lot of reserves. However, prior to that in 2007 when the reserves were going up from $200 billion to $300 billion, there were considerable fund inflows. Money is still flowing in, but obviously not the same way. The RBI is hard pressed to buy enough dollars to prevent the rupee from appreciating. Fundamentally, you need the inflows but unfortunately it cannot be tailored. The rupee does need to weaken. Everybody shares the same view.
We saw the RBI buy more dollars in the forwards market than the spot market…
Every time the central bank buys dollars, they have to put rupees into the market. There is already a lot of liquidity in the system. Also, there are limited number of bonds which they can use to sterilise the intervention.
There have been talks that the US Fed will start trimming its balance sheet. If that happens do you think there will be considerable outflows from emerging markets, especially from India?
That would be the natural impact. The fact is that there has been a lot of preparation. The Fed will shrink its balance sheet but they are also looking at their economy. But I am pretty sure they will start trimming their balance sheet and it will have some impact. But it is hard to tell whether it would be dramatic or not. It does not seem like.
Corporate bond limits are almost full and equity valuations are at very high levels. Do you think there is room for further inflows?
I think it will start tapering. That’s what I have been feeling for some time. Nothing goes up or goes down for ever. Everything is going to turn one day. You look at the dollar index and see it has fallen for a year. But, hey! It rose for four years before that. You can be certain that a trend will turn but cannot say when.
What do you think about the currency revaluation effects on the forex kitty?
Many years ago, we did an analysis on the break up of the RBI’s forex reserves. Our conclusion at that time was that the RBI had diversified very sharply out of dollars. If that is still the case and you take into account the strengthening of the euro, I do believe that revaluation could have been one of the contributors to the rise in forex reserves.
Do you think the rupee is overvalued currently?
I think the rupee should be weaker compared to current levels. I talk to a lot of companies and in terms of both exports and import competition, I think it should be weaker.
Do you think the currency derivative markets need to be developed in India?
I think not just the derivative markets but the entire forex market. Globally, nearly 50% of liquidity comes from non-bank financial institutions such as pension funds, hedge funds, mutual funds, etc. In India that is zero. The RBI needs to allow different financial entities to access the forex market. If you have different kinds of players like primary dealers, there will be a lot more buying and selling. The evolution of derivatives will come automatically after that.
Where do you see the rupee going forward?
I will tell you exactly – I have no idea. Neither does anybody else!