Rupee to weaken again if RBI reverses tightening measures: Rajeev Malik, CLSA

In an interview with ET Now, Rajeev Malik, Senior Economist, CLSA, shares his views on the RBI measures to protect the rupee slide. Excerpts:


ET Now: What do you make of the recent moves that we have seen from the Reserve Bank to protect the rupee because it does not seem to ease that much pressure on the rupee in the long term as it is hurting growth?

Rajeev Malik: Well, Wednesday was really the first effective day that we saw the rupee react to the tighter measures. Last week’s measures were poorly designed and implemented, and hence the impact was rather shortlived. But in any case when you technically raise interest rates overnight by 300 bps, the currency is bound to react. The critical question really is how long can this liquidity squeeze last? Whether RBI will have to tighten further or when they begin to reverse this? If they begin to reverse this, the rupee is going to crap out again. So these are some of the things that are going to be discussed.

ET Now: What about your views on where you see the rupee headed by the year-end? Do you think we could see levels of 65 and what would that mean for the India macro fundamentals and do you think that there is a risk of an India sovereign downgrade then?

Rajeev Malik: Well, the end of 2014 forecast for the rupee does not change. That still remains at 65 to the dollar. In the very near term the rupee can gain some mojo to go up to possibly even 58. But quite frankly given how we think global macro is going to develop especially in terms of capital flow rebalancing, it will be exceptionally difficult for the RBI on a 6 to 12-month basis to hold the rupee at 60. Up until recently one of the right things the RBI was doing was not to be wedded to any particular level.