Blasé Capital oh, rupee
It is a tussle between the central bank, regulator, and speculators. It now seems that it will be a fight till the end. Either of the two will need to give up, at least temporarily, until the loser remounts more attacks in the future. On Monday (March 30), despite the curbs by the Reserve Bank of India (RBI) on short positions, the rupee lost ground. As we had predicted, the speculators came out growling as the rupee lost ground.
Yesterday, they were back in their caves with a whimper, as the rupee roared back to strengthen to just above INR 93 to a dollar compared to more than INR 95. At the end of the day, the central bank was in control, even as the banks, the ones caught in the middle like a deer in the rifle-sight, or sheep to the slaughter, faced the prospects of huge losses. These were the unintended consequences of RBI’s moves.
Apart from the curbs on short positions, the central bank stopped offshore-onshore arbitrage, prevented repeated speculative hedges, and reduced circular trading and risks. Legitimate hedging, which is crucial for banks and currency players, is allowed if it is genuine, and requires proof. In a way, the RBI beat up the speculators with policy lashes, and the decibel noise reverberated through the currency markets. It was clear that the central bank will not allow the rupee to touch the scary milestone of INR 100 to a dollar, which was predicted by many experts, or allow it to do so over the next few months. The trick is that one needs to defend and support the rupee so that it remains stronger, relatively, if the Iran war and energy crisis ends soon. In such a scenario, the rupee cannot be allowed to be manipulated by greedy speculators, who wish to make a fast and easy buck. Of course, if the war does not end soon, the rupee will reach or breach the INR 100 mark against the dollar, albeit a bit slowly and steadily.
RBI’s moves, coincidentally, came after the finance ministry told Parliament that the rupee was fine, “absolutely fine,” and it had performed better than the other Asian currencies, and those of emerging economies. The state minister explained that the central bank did not have a support level in mind, and never does, and its job is to ensure that there is no excessive speculation, and currency finds its real level at its own pace. In effect, no one can force the rupee down, or weaken it with might. Might will be dealt with might, money power with policy power. One needs to remember that in the recent past, the RBI intervened in the market with money power, and lost dismally. Some experts claim that the policy measures are
aimed to achieve temporary results, and blunt panic and paranoia. The fact remains that the rupee is on a weak wicket, a sticky wicket, in fact, and no batsman, not even the RBI, can withstand even timid bowling attacks.
In the bargain, according to media reports, some of the banking stocks lost up to four per cent and above during yesterday’s trading. At some point or the other, each of the banking stocks was in the red, even as the Nifty Bank index lost nearly three per cent, as the tighter RBI rules may imply huge losses for the banks. The index lost more than four per cent this week, and underperformed the broader Nifty. According to a brokerage house, the bulk of the losses will be booked by the foreign banks, whose exposure is 45 per cent to the currency derivative segment, and private banks, whose exposure is 40 per cent. Although the estimates for the overall losses, INR 5,000 crore, are not unusually high, or unmanageable, the panic on the Dalal Street and volatility on the Main Street is due to sentiments. No one knows how far the RBI will go to protect the rupee. No one knows the moneybags with the speculators, who sense a killing on the currency exchange.
Bears growl and cower, stand up to their giant heights, and go on the four legs to escape to their hiding places. The bulls are not charging, as is normally the case. In the form of the regulators and policy shapers, they seem to stand their ground, not budge an inch, and make up for lost ground, or territory, if any, with renewed policy dances and moves. The former, bears, are aggressive, moving with a combination of wildness and tameness. The latter, bulls, are stealthy, quiet, cunning, moving back when pushed, and quietly striding ahead to cover lost ground. The target in the mind of the central bank seems to be INR 93-94 to a dollar, and not let it breach INR 95, from where it can slide to INR 100. The bears want to see INR 100, or maybe INR 110, who knows. In the process, the banking system may go for a six, even if temporarily, as foreign exchange deals, hedging, moving money from one currency to another, are regular features without which a bank cannot survive. They need to operate with both hands tied behind their backs.
