Column: Good luck, Governor Rajan

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Updated: Dec 08, 2015 12:34 AM

Increasing rupee volatility is assured and RBI must be on full-focus standby over the next few weeks

In an earlier column (A quick fall for the rupee, slow recovery, August 25, I had expressed a concern that the rupee may fall sharply, and it did, indeed, plunge by around 2% in the past month. What is worse, like the rains in Chennai, it remains unsettled by a thunderous head-and-shoulders chart pattern that has been broken, suggesting a technical target of 68 to the dollar.

RBI appears well aware of this and has been intervening heavily to prevent a substantive break of 66.80, the level they protected, all guns blazing, back in September. They have been tentatively successful in averting the collapse thus far, but it appears that the market will keep up the pressure.

The US employment figures Friday, which showed continued ‘steady to strong’ employment growth, has turned a December rate hike by the Fed into a near-certainty—this could deliver the coup de grâce to the rupee. On the other hand, the rate hike is so widely discounted that it may not have the expected effect of pushing the dollar higher. Increasing volatility is assured and RBI will have to be on full-focus standby over the next few weeks. This uncertainty could persist into 2016, since the broad expectation is that US rates will continue to rise next year, threatening to push the dollar even higher.

I had been a dollar bull since 2012, even before it started to rise. In recent weeks, however, I am beginning to think that the dollar rally may have already run its course, certainly against the Euro. My long-held view—that the Euro was bound to implode due to its internal inconsistencies —has itself imploded as a result of multiple conversations with people from Germany, France, Italy, Belgium and even Greece, that have made me realise that they all see themselves as Europeans—period, no discussion.

And as I have to keep relearning over and over again, the heart—reflected in a committed and visceral belief—will always win over the head, logical intellectualisation from venerable analysts in the US and the UK, and not-so-venerable analysts like myself (till recently). This irresistible force has already pushed aside the apparently immovable object of the Greek crisis and is quite deftly managing the current horrifying immigration crisis. There will, of course, be additional tests of European unity over time, but I, for one, now fully accept the Euro as a permanent entity, as much as the dollar or the yuan or the rupee. And, if the Euro is not going to fall apart, parity with the dollar is much, much, much too weak—indeed, I was shocked at even the 1.06 levels we saw last week.
Of course, if the dollar stops strengthening against the Euro, it doesn’t necessarily mean it won’t strengthen against other currencies. The yen looks vulnerable, and I think commodities will remain depressed. Gold may see a small bounce and emerging market currencies may see different spins, since global investors are likely to remain risk-averse, since, despite the apparent revival of growth in the US, global demand remains depressed.

Last year, India was hot—one of two (the other being the US) investment destinations—and over $21 billion flowed into our debt markets. It is hard to see that performance being repeated this year, partly because in a risk-averse environment, there may not be any significant flows into emerging markets (and much of what there is may be captured by China, particularly with the IMF having signalled its comfort/delight with China’s efforts to internationalise the yuan) and partly because the bloom appears to be off the Modi rose.

To be sure, the macro-picture in India has improved quite a bit since last year—the fiscal deficit, for one, is pretty much on track—but much, if not most, of this improvement can be laid at the door of the substantial decline in commodity (notably, oil) prices. This “gain” will not be available next year or in the near future. On a more micro basis, there are few companies that are showing any sort of meaningful growth, investment remains very, very quiet, and there has been a malaise spreading through the economy over the past year or so.

This malaise burst into the spotlight with the famous—and, I would say, foolishly focused—intolerance debate just before and after the Bihar election. While politicians will play any card they can get their hands on, the market is not concerned with tolerance or intolerance. What it is more concerned about—and we should be, too—is that the debate highlighted the fact that the government has very, very few people who are genuinely committed to building a modern India. Witness the large number of people in senior positions of power (governor of Haryana, culture minister, assorted MPs, more than 30% of whom have criminal cases against them) who have shown themselves to be uneducated, backward-thinking and regressive. With “leaders” like these, we are not going anywhere.
The market sees all this and will mark down India’s prospects, certainly as compared to expectations. This will continue to keep the rupee off-balance—good luck, Governor Rajan.

Th author is CEO, Mecklai Financial. Views are personal

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