I tell you. We went on holiday at the end of June to New York, which was beyond fantastic. We were greeted by 2 million people in the annual Gay Pride march which almost stopped us from getting to cocktails on a deck way into the Hudson river; amazing art shows, cocktails again, some of the best restaurants in the world, and finally, theatre to burn your shoes off, topped off with cocktails (of course) at Tommy’s penthouse on the East Side. Then, to Chicago for my aunt’s 85th birthday—singing and dancing senior citizens celebrating Mrs. America. And then, London—Wimbledon and Federer. Blue skies and temperatures around 25 everyday. It was glorious.
And, when we returned in early July, there were cats, dogs and elephants pouring from the sky. To make matters worse, Federer lost in the quarter finals and the rupee was wobbling like it was about to break. Wasn’t anybody minding the store?
Well, to be fair, RBI was on the job selling down their reserves to keep the faith. Since April 13, when the dollar’s global rally started, RBI’s reserves dropped by more than $20 billion (till July 7), about 5% of their total holdings. Over this period, the dollar strengthened by a little more than 5% globally, both on the dollar index (DXY), as well as against the Euro. We estimate that around 50% of RBI’s reserves are in dollars and the rest is in other major currencies, including the Euro (see bit.ly/2L9xKe5). If this is correct, then about half the decline in reserves was a result of revaluation and the balance—about $10 billion—was due to actual dollar sales by RBI.
Additionally, RBI sold a further (approximately) $7.5 billion between mid-April and the end of May in the forward market. These sales did not come out of the reserves but out of RBI’s long USD positions built up during their efforts at preventing “excessive” rupee strength. If we estimate another $3 billion of forward sales in June, there would be more than $10 billion of sales in the forward market over the period, bringing total intervention from RBI to $20 billion.
This was nearly four times the dollar sales in 2013 (after discounting the revaluation, but not including any forward sales, for which data is not available), at the time of the taper tantrum just before Dr. Rajan came in. As we know, Dr. Rajan immediately increased interest rates and announced a NRI deposit scheme, which turned the tide for the rupee, despite the fact that the dollar rallied monstrously—by more than 20%—over the next few years.
Currently, while the US economy is doing really well—it certainly seemed that way when I was there—it is hard to see the dollar strengthen anywhere like that in the near term. Further, though it is clear that the Fed is going to continue to raise rates over the next 18 months or so, the market seems quite ready for the raises and is not confounded by the uncertainty generated by Trump. To the contrary, the markets seem to love him, US exports are rising, and all seems well with the world and the dollar.
Total portfolio outflows from India since May this year were a huge $9.5 billion, almost exactly equal to RBI’s spot market sales. This was nearly a third of all the money that came in last year; from the debt segment, the numbers were $6.7 billion, again about 30% of the money that came in last year. Given that Indian interest rates, which are poised to rise further, remain reasonably attractive, and that a major global crisis seems still a ways away, it is hard to see outflows accelerating from this level in the near term. Indeed, in the last week (June 29 to July 6), reserves were flat—they actually rose by a marginal $75 million. This suggests that we may be coming close to the end of the run on the rupee.
In any event, from RBI’s no nonsense dollar selling, it would appear that it is committed to preventing the rupee from falling below 70—no doubt, at least partly to assuage Mr. Modi’s reputation, particularly as elections loom. There was already a balloon floated in the media of another NRI bond issue—I have little doubt the paperwork is done and it is ready to go.
Thus, even if there is another burst of terror in the rupee market, RBI would likely hike rates sharply and/or come out with another NRI bond issue. I think unhedged long dollars should be prudent and will certainly take some advantage of the excellent levels prevailing.
Remember, the long suffering rupee bull is back and is, as always, planning another overseas holiday.
The author is CEO of Mecklai Financial