By Jamal Mecklai
The accompanying graph shows the bus that most exporters have missed. When the rupee fell briefly below 92 at the end of January, the markets appeared to be in a free fall with no end in sight. Donald Trump’s tariffs were still loudly calling the tune and worse, foreign investors were deserting India like there was no tomorrow. Everybody was buying dollars, which exacerbated the pressure on the rupee, turning it into the worst performing currency in the world.
Of course, the bus moved on. The question now is when—or whether—the bus will return. One of the classic tricks when waiting for a bus is to light a cigarette, but I stopped smoking a long time ago and fewer and fewer young people are smoking, which, at least, is a good thing.
Now, of course, the longer you wait the more money (premium) you are losing—today, you are getting nearly `2 for December and 80 paise for June. Will the rupee fall by these increasingly large-looking numbers before then? The truth is nobody knows, but the other important truth is that any exports, certainly for June, were priced at a much more modest number—and one of the first rules in any market is that if the market suddenly gives you a gift, TAKE IT.
Of course, it would have been wiser to take it immediately, but in the heat of battle it’s very difficult to take such a decision, which incidentally also argues in favour of having your decision-making independent of the market temperature, as we have been recommending for decades.
Anyway, today, the market temperature is decidedly lower. The Reserve Bank of India (RBI) appears to be much more firmly in control, having certainly disciplined if not vanquished the rupee bears with a few tight slaps into the non-deliverable forward (NDF) arena. And the recent announcement requiring banks to report NDF trades more definitively suggests it remains focused on that particular job.
It seems clear that Governor Sanjay Malhotra recognises that part of his job is ensuring that the market doesn’t take the RBI for granted—hopefully the years of “the rupee will always fall by 2% (or 3% or, even 6%) a year” are long gone. Allowing this kind of mentality to build up is a sure recipe for serious risk management failures and indeed for the currency ending up severely undervalued (as now) or overvalued.
Again, it is important to acknowledge that the primary reason for the build-up of such beliefs is the reality that inflation in India was consistently 4-5% higher than inflation in competing countries—more power to the government for bringing this gap under control. Today, inflation in India at 1.7%, is lower than in the US, the European Union, and Japan; only China and ASEAN are running lower inflation numbers. Thus, clearly, the “need” for the rupee to keep depreciating against the dollar from an inflation differential standpoint doesn’t hold water right now.
From the point of view of export competitiveness, a weaker rupee is merely an inefficient and often not-so-quick fix, particularly with imports averaging 35% of exports in many sectors. Keeping inflation contained and of course doing the hard work of building infrastructure as well as investing in R&D and education are the more meaningful tickets. Again, the diversification of our export markets, which received a shock Trumpian boost, is another positive in this area.
But trade is the thinner end of the currency wedge—it is foreign investment that really calls the shots. With the tide apparently turning in India’s favour—certainly judging from the big AI pomp and show currently shaking the media—we could well see direct investment flows pick up, which would, of course, easily seduce portfolio flows, and the rupee could see a jump upwards. Indeed, if the RBI wanted to, they could use this as a platform to push the rupee even higher, closing or at least narrowing the real effective exchange rate gap. But, of course, talk is cheap—we need to see some action.
Nonetheless, on balance, it does look like waiting for another bus would be a losing proposition, and exporters would be well advised to start selling forward, taking advantage of the nearly 2.5% per annum premiums prevailing. In fact, it may also be a good idea to once again extend the tenor of risk identification out to at least 12 months (and possibly more).
And, while it is possible that premiums may improve further as US growth remains wobbly (markets are looking for at least two interest rate cuts in the US this year), the real story at the bus stop is spot USD-INR. Anything north of 90 looks like a gift. Enjoy it.
The author is CEO, Mecklai Financial.
Disclaimer: The views expressed are the author’s own and do not reflect the official policy or position of Financial Express.