Small policy steps may not support rupee in near term: Ajay Mahajan, R-Square Advisors

In an interview with ET Now, Ajay Mahajan, Managing Partner, R-Square Advisors LLP, shares his outlook on treasury. Excerpts:


ET Now: Do you think that the government this time around has just got the strategy in order to curb the forex volatility wrong or it has just not utilised all the options that it has at hand?

Ajay Mahajan: Well, it is a mix of two things. In my view, we have taken very small steps and at times when the market sentiment sours completely, a small step does not really go a long way in forget reversing the direction, but even stabilising the rupee. So my view is that the government has actually literally ticked the boxes on many items that we would have recommended at the outset of this sort of rupee depreciation story. However, those boxes have been ticked in such a slow manner that it has not really arrested the massive decline of the rupee or bolstered the confidence of the market.

Secondly, I believe that the measures till now that have been announced are clearly conveying the intent of the government in controlling the depreciation. So it is not so much the intent that is an issue here. To my mind this is mostly the communication and it is very hard to say what could have been communicated better, but certainly the last bout of reforms suggesting capital controls, I am not sure whether that was absolutely necessary because that gave a very negative signal to the street. At a time when the currency is under pressure, if capital control starts getting announced especially on matters like $ 200,000 remittances by resident Indians being brought down to $75000, the fact is that the number for the whole year last year was probably less than a couple of billion dollars and if the number is that small as a percentage of the total import bill and unless the RBI has very strong information on remittances having increased sharply, there was no reason to probably scare or spook the investor sentiment at that time when there is global pressure as well as domestic pressure on India, not only currency but on Indian multi cross asset sort of businesses, that is equity, currency, interest rates. So at a time like this capital controls perhaps could have been communicated and could have also been perhaps delayed to a point where they were really required.

ET Now: As you said that one has to take very harsh steps, may be not very popular, and at the same time, you slammed the government and the RBI for being little slow in imposing higher duty on gold imports. So, which way do you want them to go?

Ajay Mahajan: It is in the collective assessment and judgement of the regulators and the government that the current account situation in this country has actually deteriorated and there cannot be two views on this. So in my view, if a difficult situation or a difficult predicament for the market does appear, then the RBI and the government should have complete authority in controlling any part of the current account or the macro situation in entirety. There is no issue with imposing controls. However, the controls should be strong and should be measured. They should be announced in a way that conveys seriousness and intent of the government for a meaningful period of time. The way the controls have been announced till now has not really passed the communication test from a receiver’s point of view. Here the market is the receiver and does not understand what is the purpose behind such steps. So to my mind, the issue is not about how harsh the reforms or the steps are, the issue is that mostly they fall into the tactical window and they have been taken in a piecemeal way and have taken the punch out of the impact.