Blasé Capital RUPEE REBOUNDS
It worked like magic. It was brutal economics at its best. The central bank put the fear of God into the souls of the bankers, and the rupee, which was frantically trying to maintain its position, despite the protection and support from the central bank, bounced back with a bang. It lost more than a rupee against the dollar during the day, and came down to below Rs 94 to a dollar. At one end, the central bank’s policy to force the banks to drastically pare down short foreign positions did what it was intended to do. At the other, it ushered in an era where one can sense fear and loathing within the central bank, which may lead the speculators to take the game to the next level. Nothing is static in the war for profits, especially when a real near-global war is on, and Iran bombards new targets as it ups its war games.
Some bankers admit that the central bank’s move to limit each bank’s end-of-the-day’s short position to $100 million by April 10, was due to concerns about the “sharp and rapid depreciation… in recent weeks.” They said that positions may have expanded due to the arbitrage opportunities, as well as straightforward ones due to the continuously falling rupee. The persistent dollar outflows due to imports, equity outflows, and other global factors led the banks to “build short positions domestically while hedging overseas, creating pressure on the rupee.” Hence, the winding down was critical to stop speculation. This is exactly what the central bank did in 2011, during a period of similar currency movements, and when it was felt that “moral suasion” would not work. Of course, the official line is that the central bank did not want the banks to lose money due to the speculative tendency.
Ironically, losses are what the banks will need to immediately book due to the new limit on short positions. According to the bankers, there is no option but to unwind the current positions, estimated at $40 billion, with some banks having positions as high as $500 million each. They will opt for mark-to-market, and slowly unwind the positions over the next 11 days until April 10. In the process, they will incur losses, and lose their ability to serve their customers better. According to some estimates, positions worth $18 billion may be wound down, and this may lead to the rupee gaining more than a rupee against the dollar. However, yesterday the dollar was a rupee down, and maybe the central bank’s move may strengthen the rupee more than expected. Which implies that the feeling of fear and loathing on the main street extends to the individual banks as much as to the regulator.
The supporters of the central bank contend that the freedom that was given to the boards of the banks to manage their short positions since 2011 was to improve efficiency and autonomy, but the overriding theme was that they should not impact the balance sheets in an adverse manner. Hence, if speculation ruled, and the positions were driven by expectations and greed, it was time to restrain them. State-owned banks blame the foreign and private banks for the aggression in the short positions to book future profits, and make hay while the rupee declined. Things were going out of hand, as the rupee declined by four per cent within a month, although such a fall happens in 12 months or so. Clearly, there was excessive speculation, and unwarranted activity, which needed to be curbed. This is what the central bank did, as its job to safeguard the rupee, and the banks’ future financials.
The contrarian view is that speculation may increase in the future after, of course, a breather till the unwinding is done. Later, new speculators, sensing that the central bank is unduly worried, which implies that the situation is worse than what is visible, may enter more aggressively. If the banks are not allowed more than $100 million net positions, the ones chasing profits will find other ways to beat the rupee down. If a currency is weak due to macro factors, which the rupee is, and if the situation continues or escalates, the manipulators will sense their chances, and use them ruthlessly. In this sense, the central bank may have inadvertently sent a wrong message to the market. Now, even the bankers may believe that the rupee is weaker than what it seems, and the latest strengthening is a sign of weakening. There may be more attacks on the rupee, and many may skirt the laws.
Experts hope that the central bank is wrong, and the speculative activity was not a major concern before its policy move. If this is true, new speculation may stay away, and the rupee may hold on, neither going up nor down. But if speculation was, and is, rampant, we will have a different ball game, either a home run, or several strikes. The problem is not about the fall, but its steepness and suddenness. The central bank is okay to let the rupee find its level, but at a steady pace. After all, the rupee has lost INR 20 to a dollar since the pandemic.
