Are the emerging markets ripe for another dislocation as the US Federal Reserve begins to consider tapering off quantitative easing? Should we worry about the Indian rupee again?

It appears that global markets are not reacting as nervously as they did the last time, which is good. Of course, when interest rates go up definitively in the US, and I believe they will rise faster than most people expect, there will be an outflow of foreign portfolio investment (FPI). However, I believe the real driver of rupee support is foreign direct investment (FDI) rather than FPI, and with unicorns proliferating faster than rabbits…

During the taper tantrum in 2013, the rupee tumbled 23% between May and August of that year. But this time around can we say that the rupee is not part of the fragile five due to the improvement in the balance of payments?

While it is true India appears stronger today and exports are doing extremely well, my concern is that growth is going to be difficult and, in any case, highly uneven. Politic and the difficulty of managing the fiscal deficit could be additional issues.

By politic, do you mean pressures induced by the coronavirus pandemic?

The government needs to support the poorest people, which costs money. This means the fiscal deficit will remain a problem for some time to come.

India’s foreign exchange reserves stock is the fourth largest in the world, behind China, Japan and Switzerland. Are we better equipped this time than in 2013 as our reserves are at a lifetime high of $610.012 billion compared to $270 billion then?

I think our reserves are pretty strong and there is no cause for immediate worry on that front.

 As far as the rupee goes, the large, loose funds globally are chasing the new India tech story. So I expect volatility but no dramatic decline for the rupee.

As far as the rupee goes, the large, loose funds globally are chasing the new India tech story. So I expect volatility but no dramatic decline for the rupee

What will happen to the assets that were purchased during the quantitative easing? If investors unwind their positions, what can be expected?

As mentioned earlier, I believe the US interest rates will rise faster than most people expect. While this will cause nervousness, I don’t think the markets will collapse. Higher volatility, though, is a bigger problem.

Currency experts say the markets have been facing huge volatility of late but there has been no stated policy to define the Reserve Bank of India’s intervention. Would you agree?

I believe the RBI has done an excellent job in managing the rupee. I am working on a research paper that compares the rupee with other emerging market currencies. From my analysis so far, the rupee appears to be one of the best performers.

You are hinging on FDI to protect the rupee but a chunk of it has come into Reliance Industries Ltd. So is the FDI inflow sustainable?

As I said, it is the proliferating unicorns that are attracting money. Also, look at the huge spate of IPOs. Paytm, for example.

Is excess liquidity not fuelling inflation in India or building asset bubbles as the money is getting deposited back into the central bank?

I think inflation is and will continue to be a problem. I don’t see Indian interest rates coming down in a hurry. Excess liquidity is concentrated with banks and people with money – there is no liquidity on the ground.

Excess liquidity will certainly have some impact on inflation. This is certain to make the situation difficult for most Indians. Politics may compel the government to push RBI to harden its stance.

Is inflation a supply-side issue and there is only so much RBI can do about it? If supply bottlenecks are lifted, will inflation come under control?

I think the period of low global inflation is over. It will be a continuing battle with high volatile interest rates. Look at oil for instance. While it has dipped a bit, it is threatening to go much higher.

I think the period of low global inflation is over. It will be a continuing battle with high volatile interest rates

I think the period of low global inflation is over. It will be a continuing battle with high volatile interest rates

RBI’s aggression in the forward market will impact liquidity with a lag. What problems will this additional liquidity cause? Is excess liquidity masking the balance sheets of banks for now?

Premiums did shoot higher, but appear to have restabilized in the 4-5% per annum range. There are a small number of importers (usually multinational subsidiaries) who hedge imports fully on day 1; most of them try to ride the market.

I believe neither of these is a good approach. It is best to set a stop loss (perhaps even a trailing stop loss) and ride the market but, critically, follow the stop loss with discipline – this kind of approach can save about 40-50% of the day 1 forward on average, which, to my mind, is an excellent performance.

Considering the intensity of the coronavirus and our current state of vaccination, would there be a drag on the economy and the rupee get impacted?

Exports are growing well and imports are not as strong because of the weak economy.

Is there a risk to the current account and the rupee if Covid-19 recedes and growth comes back?

I think growth will take a long time to come. As far as the rupee goes, the large, loose funds globally are chasing the new India tech story. So I expect volatility but no dramatic decline for the rupee. But I really have no idea where the rupee will be in a month or a year or in five years – it is foolish to waste time thinking about something you can’t control!

The government has announced a series of credit guarantees schemes. Will that by itself be enough?

No.

In your view what needs to done to boost growth?

We need to invest in health, education and justice. That is the only way we can get back to 7-8% growth, although it will take a few years assuming that we start now.