Amid the gloom and doom predicted for India, the worst is over for the country’s current account deficit and its currency, feels Manoj Rane, MD and head of treasury at BNP Paribas. Rane says that although fundamental weaknesses cannot be wished away, there are positive developments, which would improve the current account position in 2012-13. In an interview with FE’s Aparna Iyer, Rane explains the sharp depreciation of the currency and why certain measures didn’t bring in desired dollar flows. Excerpts:

The rupee has fallen drastically and the current account deficit is becoming a big concern. What is your outlook?

The current account deficit is about $90 billion for 2011-12. Gross oil imports, due to increase in oil prices coupled with the depreciation in the rupee, alone accounted for $40-50 billion last year.

Gold imports were around $58 billion. We needed roughly $90 billion to bridge the current account gap, which didn’t happen and hence we had BoP negative for the first time. This year we have done some tinkering.Firstly, there is customs duty on gold imports, and gold imports have fallen. Secondly, oil prices have also declined. The mere contraction of these two expenditures would pay a lot of dividends in term of reducing the current account.

Another thing that has not been noticed is we export a lot of refined oil because our refinery capacities are far higher than domestic consumption. So, if we have contraction of oil imports in terms of value and if the refining margins hold on, the net number in terms of oil imports could come down.

Therefore, the current account is likely to be better this year than it was the previous year.

The rupee forecasts are around 52 per dollar for the year-end in sharp contrast to 57-58 levels that was talked about a month ago.

What is the sentiment in terms of FII outflows?

I think the best indicator of sentiment is the stock market. The Sensex has been sticky at 16,000. It slipped below 16,000 only for a brief time. There are many reasons why further downside of stock markets is unlikely. The currency is weaker, FII outflows are muted. After the Vodafone case, we did witness some outflows but on a net basis it is not much.

Why would FIIs pull out money when the currency has depreciated 20%?

For FIIs, the valuation is better than last year. What they could buy last year, they can buy 20% more now and at better valuation for the same investment amount.

Why have measures such as deregulating NRI deposit rates not yielded the desired inflows?

The NRE deposit rate easing was offered as a panacea for our problems. Everyone was positive, huge inflows were expected. But it has not happened. Only $2-3 billion came, including from conversion of FCNR(B) accounts into NRE deposits. This happened because large money comes when there is leverage.

Unfortunately, when the easing was announced a couple of other things played out. The dollar/rupee forward premia rose and Sebi auctioned corporate bonds to FIIs. FIIs bought and hedged in forwards, which sent premium further up. It became unattractive for NRIs to bring in money because of high premia. The reason is NRIs have seen a big currency depreciation. At 9.50-10%, if you add premia for hedging, the cost plus LIBOR itself works out to 7.50%. My return is just 9.5%. If the premia goes up further, there is no reason to bring in money.

What do you expect from the RBI’s upcoming policy?

Rate cut action will largely depend on how inflation pans out. Of course growth is important but if inflation crops up again, then I doubt if they would be aggressive on rate cuts. In any case, there may not be many cuts through the year. A maximum of 100 bps for the entire year. May be 50 bps in the next 6 months and another 50 if things play out positively in the 6 months thereafter.