RBI has enough ammunition to ensure an orderly rupee depreciation is on the cards: Suvodeep Rakshit

“The RBI has a comfortable amount of forex reserves to ensure that an orderly depreciation is on the cards plus the RBI has been proactive in looking at measures to shore up not just the spot market but also the forward market which was something that they did last week in terms of forex inflows and liberalising some of the forex flows,” says Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities.

Let’s first discuss the expectation of inflation, You track global data pretty closely. So why have India inflation, US inflation become so important?
First of all, globally inflation is a worry and it is not restricted to just one country, it is across the globe. The US becomes important for the simple fact that it dictates how the US Fed will move from here on, whether we have 75 basis points in the next policy, whether the risks of another 75 basis points increases as they have charted out in their dot plot.

That is important because that will in turn reduce the interest differential between most of the other economies and especially in India which is why we are talking about global inflation and how the local inflation is panning out and how the RBI might react to the global as well as the domestic factors and why inflation prints have become important.


Now if one looks at the kind of inflation print we are expecting today, which is for the month of June, we expect it at around 6.9%. Now the 6.9% includes some beneficial impact in terms of lower fuel prices, the petrol and diesel prices reduction that we have seen through the excise duty cuts which was towards the end of May.

Other than that, we have seen in June the prices for most of the articles stay on the higher side. There has been a bit of an upside in certain food items. At the same time, going forward, some of these price pressures will reduce. We have seen globally how commodity prices have been reducing and that should have a beneficial impact.

The way we are looking at inflation right now, we expect the inflation to be around 7% for some time till around September. From the second half of FY23, we should have inflation starting to come down and go towards a more manageable range somewhere between 5.5% and 6%. That is beneficial and that is something that the RBI will take into consideration.

You also track what is happening with the rupee because we are now very close to that 80 mark on the rupee as well. The RBI has done its bit and come out with a couple of measures but that does not seem to be arresting the fall. How do you see this panning out for the current account and fiscal deficit as well?
First of all, we should not be obsessed about a certain level of the rupee. What we should be looking at and as market participants we should be bothering about is what the pace of the depreciation is; whether the RBI is managing an orderly depreciation because at the end of the day, given the fundamentals of the rupee, a depreciation bias will always remain.

Globally, if you are looking at what is happening, the rupee has not depreciated as sharply as some of the others including even the developed market currencies. The dollar index has appreciated by around 11% and that is reflected in some sense in the Euro which has depreciated by 12% in the calendar year that I am talking about. The INR has depreciated around 6.5%, China’s Yuan around 5.5% which is not bad.

But it is important to have an orderly depreciation and here RBI has done a commendable job, given the $25 billion plus trade deficit in the last month and that has a bearing along with the kind of capital outflows that we have seen on account of FPI outflows. Here, in some sense, the strength of the forex reserves come into play.

The RBI has a comfortable amount of forex reserves to ensure that an orderly depreciation is on the cards plus the RBI has been proactive in looking at measures to shore up not just the spot market but also the forward market which was something that they did last week in terms of forex inflows and liberalising some of the forex flows.

This again has to be seen in terms of the fact that obviously the rupee will depreciate and probably 80-81 levels will be tested. Fundamentally, the rupee remains on a depreciation bias but the RBI has enough ammunition to ensure that an orderly depreciation is on the cards.

Overall from April till now, a lot has changed in terms of commodity prices and a lot of action has come in from the government, putting tax on exports, excise cuts. Do you think that the inflation number has a chance to be lower than expectations?
I think expectations were being set that fuel prices would be revised up. We have not seen that happen. If at all they get revised up and how the energy prices are managed will be important.

Second, if the monsoon pans out well in July and the sowing picks up, then it can help in cooling off a lot of the cereal prices in terms of the vegetable prices which can have a beneficial impact. Now when we are around the 7% mark, till September we are taking certain upsides in these kind of momentum in prices on a month on month basis and at the same time there could be some positive prints in terms of inflation outturns being lower than expected.

But broadly, the pass through that usually happens when we talk about global prices – whether it is energy prices or metal prices or food prices – the pass through is often gradual because it is not as if it is a straight forward global inflation that global commodity prices come down and India prices come down. The pass through happens through the companies, through the input prices and ultimately is reflected in the output prices.

It has been a sluggish movement when the input prices were increasing and it will be a sluggish movement when the input prices come off. So do not expect and broadly the markets are primed towards that. They do not expect a very sharp fall in inflation. There could be some prints which are lower than expected, but that is again broadly within the range of 7% in the near term.