RBI continues to baffle us. Plays the Joker and laughs at us. You just can’t predict what they are juggling. Which ring goes up first and why? You are also not sure how long they will be juggling and when they give up? You can’t also predict when do they energise themselves again and how much is the energy?
Last Saturday Mr. Das said that even if USA labels India a currency manipulator, RBI will keep buying dollars. RBI needs to do so to tackle with any external shock.
Now they have created a conundrum, the answer to which they haven’t yet perfected.
A disgruntled investor may have the following questions in mind!!
What is the level they are protecting?
How much time they will protect a particular level?
Even after making such strong statements why they go missing at times?
Why they suddenly start buying rapmantly causing a movement of 40 to 70 paise?
Why they manage rupee in a range of 8 to 10 paise some days at a length?
Why they allow sudden bouts of appreciation when they have put it in their mandate to protect?
How much is the amount of Fx reserves they want to accumulate which can absorb an external shock?
How do they determine which shock requires what FX reserve?
Why they don’t come out and tell us clearly what they are looking for?
Why surprise, create jigsaw puzzles without solutions, why create a conundrum?
Why act like Peoples Bank of China with half the spirit and strategy?
Hope someone forwards this to Mr Das.
Presuming that he doesn’t answer this at all!!!
We still need to live with the situation which has been hanging like a pendulum at the whims and fancies of our Central Bank.
But then we need to understand and analyse. Rbi however makes it difficult for us to do that.
So at times RBI is allowing fundamentals to work and sometimes they don’t. Had RBI been absent, rupee would have been at 71.20 today.
That’s why we have been saying that the bias is towards depreciation. However the Fundamental Trend is towards appreciation and RBI is playing Tug Of War against the forces. Dollar Depreciating 10 big figures from 100 to 90, could have easily appreciated rupee by at least 8% had the USD INR correlation with Euro be allowed to work. That’s how instead of being stable, Euro INR moved to 89 from 79 in six months time.
Having said that we believe that RBI ideally would be changing levels that they protect, quite often, mostly without logic. They had protected 74.80 for quite long, then entire August 2020 was at 74.50. And later in September 2020, for God knows what reason they let it appreciate to 72.90. and then again within 2 months time they took it to 74.90.
In such scenarios strategies may fail. So it is left to luck and chance on which side of the spectrum you fall, with or without hedge.
In such scenarios we advise that you do the following only:
*Protect your costing.
*Take a calculated call.
*Buy or Sell at ranges which last for 1 month.
*Do not delve too much into notional profits or gains as these are exceptional circumstances which the pandemic has created.
If a corporate has been able to manage the costing or has realised value above the markets rates, it’s a fantabulous job. So if you find that you have managed 74 for your payables in FY 2020-21 and managed 75.50 for your receivables you have once again done a fantabulous job.
The excess money which US has put into its citizens have rocketed our equity markets. FII’s are only investing since the last 8 months. We Indians are supposed to fight a battle, wherein our manufacturing has been hit, jobs have been lost, GDP has sunk, and the economy is in depression. That excess inflow of money has created a challenge for our RBI also.
We mentioned this just to give a perspective as to why RBI is acting like a Joker. A joker which laughs at us, unintended, itself being amused, not knowing what it should be doing. Having said that they have managed the juggling well and have helped in maintaining the stability while other emerging market currencies haven’t been able to manage the volatility.
Hence though the first two-three sentences of the article are true, but it has a background which we ought to understand.
We believe the external shock which RBI is talking about is the flight of money by FII’s which may happen out of our stock markets. If money outflow from equities on Nifty and Sensex is rampant it may lead rupee to depreciate to unprecedented levels. That’s why it is an external shock which we can’t control due to laid down policies. However what we can do or control is creating a hedge against that. That’s why RBI may be building the reserves.
Amen!!
Penned by Rakesh Jain of Vidyut Mudra