With the rupee falling to unprecedented lows, Jamal Mecklai, CEO, Mecklai Financial Services, is busy fielding calls from clients. The forex expert believes that the central bank should have stepped in to arrest the slide of the currency at least in October when the trend was in our favour. Mecklai tells Shobhana Subramanian that while such intervention may or may not help over the medium term, given that the Indian currency is correlated to the dollar and so will move in sync, it would nonetheless send the markets a strong signal.

The rupee has seen a very sharp depreciation ?

Between January and August, the rupee was trading in the range of 44.50-45.60 to the dollar and premiums were 6% a year. So no importer wanted to really cover his dollar liabilities and, looking at it from their point of view, perhaps it was logical because the rupee has been fairly stable. My view, since February this year, has been that the dollar would turn because it had been falling for so many years?at one point, it dropped below one Aussie dollar. I was partly right and partly wrong

because the dollar did turn, but not until September, after which it turned very sharply.

What has really exacerbated the fall?

If you look back a little, the euro fell by 8% in September and the rupee came off by some 7%, but while the euro recovered some ground in October the rupee didn?t recover as much. Since we are in a fairly open market, what the dollar does will be reflected in our currency, more so at some times and less so at others. But why did the rupee not strengthen in October when the euro did? My view is that there were short positions in the market and, if you noticed, the forward premiums had started going up, so clearly some importers were buying. But the problem is we still have short positions today with companies?who should not have left open positions in the first place?not having covered their positions.

What do you suppose could happen to the value of the rupee?

Who knows? Suppose the euro holds together, which I believe it will, there could be a strong relief rally. But, ultimately, I believe the euro would have to fall because otherwise how will Greece live? The risk really is that the dollar could strengthen much further and so the rupee would have to go down. What can anybody do? But one thing about the market is that one should be careful when everyone?s looking the same way, as they are today. And no one can think of any reason why the rupee would turn. But the market is such that any trigger can change the trend. Although I?m not convinced that the dollar will weaken because it has just turned. While it could come down a bit, in general I feel it could rise.

What can the Reserve Bank of India do?

I believe, and I have felt this for a long time, just as volatility in the currency market is too high right now, volatility has been too low in the past. Of course, for a central bank to come in and infuse volatility is somewhat weird. But perhaps RBI could have intervened earlier, in October, when the euro was strengthening somewhat. There?s no need to fight the dollar but if the trend is in your favour you could act. Right now too they could ask banks to close their dollar positions, which means that if treasuries are long dollars, which I suspect they are, that much demand would be curbed. In the medium term, it may have no impact but it could arrest the near-term slide and keep the speculators away. RBI, which has been so brilliant and creative on the lending side, doesn?t seem to have too many ideas on how to deal with the rupee.

So do you feel it?s wise to defend the currency with reserves?

Today I?m not worried about the reserves?we?ve got around $300bn. And, intuitively, I don?t think I would worry till about $280bn. The way to do it is to time the intervention so that they do it when the dollar is correcting overseas. But, at some point, the rupee will turn. The headline of my next column is, ?India is not going to hell.? And it?s more political than about markets. Let?s not get frantic, we?re still growing at 6.5%. True, there are problems, there?s inflation and there?s the deficit. And at a micro level, there?s the risk to corporate balance sheets, which is serious and, in turn, poses some risk to bank balance sheets. But at this stage if companies haven?t hedged, there?s very little they can do. All I can say is the only thing worse than learning from experience is not learning from it. Right now we can only pray.

Do you think the rupee is now undervalued?

I think 50 is a fair value for the currency. If you recall, at 46 levels, everything was going well, there were imports and exports, and no one was complaining. It?s all very well to say the rupee should strengthen, but in reality things work differently, and since the dollar has strengthened since August, the rupee should probably be at 50 levels today. The Real Effective Exchange Rate, according to me, has two fundamental flaws. One relates to the date from which we start measuring the move; after all, we are choosing the the date on which we feel the rate was correct. I would rather use anecdotal information and say the value was correct at 46. The other point is that we can?t consider only inflation because there so many other forces like terms of trade or competitiveness.