Expect rupee to depreciate marginally going forward: Mythili Bhusnurmath

In a chat with ET Now, Mythili Bhusnurmath, Consulting Editor, ET Now, shares her macroeconomic outlook. Excerpts:

ET Now: What is your sense on macroeconomic fundamentals and how do you think the IIP data would come out to be?

Mythili Bhusnurmath: There will be a lot of uncertainty reflected in the market, particularly because of the US Fed ending its tapering by the end of October. So, there will be nervousness and the rupee may depreciate marginally, particularly because it appears to be overvalued, given the inflation differentials between India and the US; or based on both the six-country model as well as 36-country model. This is why, I think, markets are seeing some correction. Although it is partly because of the dollar strength, but it can also be attributed to the rupee being overvalued.

Moreover, there have been reports that the RBI is concerned about the large unhedged exposures of corporates. Mind you, the RBI had tried to caution corporates about the same, since the stability of the rupee cannot be taken for granted, particularly once the Fed gives any signal about the rate cycle reversal, the rupee will most likely depreciate further and bring in more volatility. However, despite these warnings, Indian corporates are not willing to take the hedging cost, which will prove dangerous, not only for the corporates, but also, at the macro level, for the country as a whole.

Also, the markets have clearly run way ahead of fundamentals. The IMF and other multinational organisations have been upping India’s GDP growth at a time when they globally are bringing it down marginally. Overall, the sense is that the Indian economy is doing better, but by how much remains questionable. Though there is a lot of positive sentiment, on the ground, not much has changed. Sustainability of many of the macroeconomic fundamentals - be it the CAD or inflation - remains a question. For example, the CAD improvement was because of administrative measures on gold and partly because of a fall in the international oil prices. There is a certain amount of nervousness about whether the improvement in fundamentals is for real or is it temporary.

However, at the moment, I would say no major changes are expected in the near term, unless we have some nasty surprises on the IIP. The inflation data will be subdued because of the base effect. So I am expecting no unpleasant surprises.