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IndusInd’s Harding Says No ‘Quick Fix Solution’ for Rupee Drop

J. Moses Harding, executive vice president at IndusInd Bank Ltd. in Mumbai comments on the outlook for rupee in an e-mail to clients.

The local currency, which weakened past 52 a dollar yesterday, is approaching a record low of 52.18 touched in March 2009.

On capital flows:

“There is no quick fix solution on hand. There has been sudden reversal in rupee fundamentals driven by the widening trade gap and reduced capital flows. The structural factors too turned against the rupee through uncovered imports and unhedged foreign currency carry-trade liabilities.”

On Indian economy:

“It is now very difficult to look for reversal in rupee depreciation when the Indian economy is struggling with high inflation, low growth, high fiscal deficit, tight liquidity and high interest rates. Moreover, the investor community from the Western economies is struggling for breath. All these issues cannot be addressed overnight.

‘‘It is possible that rupee has shifted into a higher base of 51 per dollar with next objective at 54 to 56 per dollar.’’

On cash availability:

‘‘Reserve Bank of India’s ability to intervene is also hampered by the squeeze in system liquidity and limited dollar reserves in its balance sheet. Aggressive intervention by RBI in the spot market will lead to higher call money rate and widening of arbitrage between off-shore non-deliverable forwards and onshore over the counter, while selling in the forward market will push the forward premium down to widen the demand-supply gap in the forward market.

On overseas Indian Deposits:

‘‘The only option is to open up the non-resident Indian gate by deregulation of interest rates. The release of dollar liquidity from non-resident Indians will be good for the rupee. Overall, there are no clear cut solutions to save the rupee from distress and let us tighten our belts for hard landing.’’

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