'Rupee is responding to market realities'

Stay away from the market as much as possible, says Jamal Mecklai, ace risk manager and one of the most astute market observers and analysts.

Rebello Dominic RN BhaskarUpdated: Friday, October 07, 2022, 01:56 AM IST
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Mecklai is the Founder and CEO of Mecklai Financial, a consulting company focused on treasury risk management. With offices at five locations across the country, his company delivers customised solutions, backed by its proprietary risk management approach, high-quality market research and robust technology processes.

An alumnus of Indian Institute of Technology-Mumbai, he had stood first in the all-India entrance exam in 1967. He graduated in chemical engineering in 1972. For higher studies, he went to Rice University, Houston, Texas and completed his doctoral research in biomedical engineering in 1972-75.

Over the last few years, the value of the rupee has been continuously falling against the dollar and has now breached the Rs.80/$-mark, he said. There are a multitude of factors that have led to the devaluation of the rupee against the US dollar with the Russia-Ukraine war, and the raising of interest rates by the US Federal Reserve to tame inflation being among the major ones.

The Free Press Journal organised a webinar with Mecklai to try and understand why the rupee has fallen so much and how investors should maneuver their fortunes during these changes.  He spoke with DFominic Rebello and RN Bhaskar (both from FPJ) and advised investors to stay put with their current positions.

Edited Excerpts:

What major events are responsible for the battering of the rupee?

I don't think the word battered is correct, in this context. One of the key things to understand is that markets are markets. The word 'batter' can be used, in my view, only when some fundamental mistakes are made. For example, the sterling was battered. I would say the rupee is responding to the realities of the market. Now, what are these realities? Most important has been the fact that the US Fed, which had really failed to even be aware of inflation, woke up and started raising interest rates. Everybody got nervous, the equity market started collapsing, and the dollar strengthened. With equity markets collapsing, people were really worried about what was going to happen globally and foreign portfolio money started flowing out. That along with the fact that the dollar was strengthening starting to put a lot of pressure on the rupee. That said, the Reserve Bank of India has done a great job in terms of controlling the decline.

Is it true that the RBI spent billions of dollars to shore up the rupee as some reports say?

I don't have the numbers but the interesting part is that the RBI Governor said 67% of the decline in reserves was due to valuation changes. So, the total decline in reserves was not because of simple dollar selling. The fact is that the reserves have declined by a huge margin and the RBI has been selling dollars. The RBI held it at around 80 rupees to a dollar for a while. Finally, it slipped down and now it's a little bit calmer. It is still fluctuating but it appears that the trauma is over. One of the things that I just wrote in an article on the rupee is that there were two forces, one was that the Fed was raising rates to compensate for the fact that it had not paid attention to inflation, and the other was how it strengthened the dollar, so all other currencies were in decline.

Markets are their own kind of animal. Suppose on Wednesday, interest rates go up, the currency goes up. However, on Thursday, if interest rates go further up, the currency could decline. It's not a one for one correspondence. There are two or more forces at play. I have felt that we're beginning to see that when the market finally accepts the fact that the Fed has got its act together, that they will still raise interest rates, then this story will change. In other words, it cannot strengthen forever. The dollar index strengthened hugely and went up to nearly 115, now it has fallen to 111 in three days.

My sense is that the market believes the Fed is going to control inflation. That doesn't mean there will be no ill effects. There could be recession coming which may badly impact the equity markets. But when the dollar stops strengthening, what will happen to the rupee?

Another interesting thing is that in July and particularly August, despite the fact that the world was terrifying, a good amount of foreign money came into India. Despite the chaos, India is not looking like a basket case. In fact, India is looking good, we are very lucky due to some global developments. So, even if global equities continue to fall, the portfolio flows into India may slowly return. I can't see them coming back like gangbusters but I feel that the pressure on the rupee will be a little bit lower going forward.

Had India gone for more FDI rather than FPI, would it be in a better position?

First and foremost, I don't think the country has ever not wanted foreign direct investment. Further, FDI and foreign portfolio investment are two separate processes. FPI is easier. In FDI you have to make structural changes. And I think we're not doing bad at that. To be honest, I'm saying we can be better. I think in India people who are using FDI are really looking at the long term. India is a long-term place. So I'm not sure then whether will attract more FDI. I think when things are crazy in the world, nobody invests.

India has to make several payments for its debt obligations, which squeezes forex reserves even further. How will it impact the trade deficit?

I don't have all the statistics but I am continually amazed that the RBI's Monetary Policy Committee, the Governor, and Deputy Governors, all say that there's nothing to worry about. They keep saying that the trade deficit is going into a deep hole but there is nothing to worry about. I'm a bit concerned about this.

I think they have been calming the markets with their talk. However, I'm a bit uncertain about this as one of the things I see, from my business point of view, is a lot of exporters are seeing growth slowing down in America. We know Europe is going pretty far down. So, exports are going to be lower than the forecast. RBI says that imports should be less because oil prices are down, and commodity prices are down. But the good news is that India is growing reasonably.

But I think trade pressure will not create a downtrend. Something can become a major problem when there are other negative circumstances. There are times when a trade deficit could create a crisis in the markets. So, we need to take a close look at that. People have forgotten how to manage risk. So, when things get crazy and central banks are not in control, people go haywire, which is where we are now.

My father used to say, the central bank should be like God, he or she is there, but you don't ever see them till there's a crisis. In less than 15 years, God has been talking more than anybody else [That is not good].

Ever since the Fed began hiking interest rates, the dollar has strengthened. However, if you look at the dollar neutrally, you'll find that it is very weak. You will find the US economy strong but wobbly. So, is the strengthening of the dollar justified?

The dollar has been strong. It's like how does one measure it taking the dollar index, the dollar index has gone up 15%. Now it's coming down. I've been feeling that at some point the interest rate play will continue because it is needed. But the dollar's rise will start coming off as just a short-term thing.

Another thing is the US economy is weakening. And so is the global economy. Historically, when the global economy is weak, the dollar weakens. When I say weakening I am not saying it weakens from 111 to 90. But it's significant that the euro, which broke through and dropped to 95, I have written an article on this, it is not going to go to 115 and 95 but the next week it almost hit it and came back to 99. The dollar index is back to 111 or something like that. So, I think we might be in a period of relative calm and there will be a new force in town that really turns things around globally. In India, people respond to that depending on what happens. In India, we have to worry about the trade side.

The reason I said the dollar should be weaker is because of two factors. One, the dollar was the international currency for any trade. But, after the Ukraine crisis, one country after another stopped relying entirely on the dollar and was willing to trade in the rupee, yuan, ruble or whatever. The second factor is almost every central bank has reduced its dependence on the dollar in the basket of currencies which form the reserves of countries.

Before seeing whatever sort of offline transactions that have been happening, for example, in Indonesia and Bangladesh, the currency transactions that were in dollars are no longer in dollars. The scale of such transactions is very small.

If you want to do some invoicing in yuan, you can but China is not a free market.

In terms of reserves, 60% of the reserves of the world are in dollars. Interestingly, less than 60% of RBI's reserves are in dollars. So, this whole idea that you can write off the dollar is far fetched.

It has to do with Saudi Arabia, and with oil. America will do what it takes to make sure that the hegemony of the dollar is not threatened. Every commodity is traded in dollars. Pharma companies sell their products in dollars. People are used to it. The dollar's hegemony can be lessened but I don't see it happening soon.

So, when you look at the entire scenario of the dollar, the euro, China, India, do you think the rupee is relatively stable.

Yes, I think it's reasonably stable. And it's not in a crisis as well.

What do you think will strengthen the rupee once more, in the coming days?

The good news in my job is that I have to keep learning. Till recently, I believed that if your company is into exports don't worry about the market and come up with a process that you can just lock it and follow it. A lot of our clients following this practice are doing reasonably well.

But, now I feel the world is really changing. I think volatility is going to be more or less continuous and is likely to be here for a long time.

Russia is not going to let go of Ukraine and this will have a ripple effect. So, this will lead to further uncertainty in the financial world and hence the need for risk management. We have to reassess our view. Normally, I would say you do this and sit tight, but now I can't do that. I'm gonna have to work harder.

Maybe every quarter you got to redesign what you're doing. Another interesting thought from all this is that inflation in India appears to be – finally – at a level that is comparable (indeed, currently, lower than) that in the US and other developed markets. Perhaps, global investors, who routinely expected a 4-5% decline in the rupee to account for inflation differentials will be singing a different tune going forward.

If we are able to contain our inflation, then the whole equation changes.

The funds will actually start returning to India, right?

It means that the fact that we are on a permanent downslide may change. So, it's an exciting time.

If the rupee strengthens, and if global trade continues to be fragmented, do you think the rupee will remain stable even after that?

I have no idea where the rupee is going. I'm not saying that the rupee is going to strengthen, you have to be very careful. I'm just saying that we need to look at all these forces at a given point of time, see what we think, and then take a call.

I think India, as I said earlier, is very lucky. We are growing in size, and the governments have been doing some things right, though a lot of other things are wrong. The whole China play which has changed completely, suddenly makes India look more attractive. So people will be more willing to put up with some of our stupidity and foolishness than they were three or five years ago.

One recommendation that most analysts make is that this is the time when you should not be investing in bonds, maybe not even equity, but to keep the cash.

This is not a time to take any fresh risk. So, I would not put fresh money in any market. By the same token, I wouldn't pull anything out either. So generally, I will say now is your time to sit tight and wait and watch.

Your advice to investors?

Stay away from the market as much as you can. If you are a professional who is trading in the market, have a stop loss and manage your money, do so. Professionals should enter the market and non-professionals should stay away. Convert your money when you need it. Don't try to play the market when you don't know anything. Because the truth is -- I won't say most people -- I would say nobody knows what to do with the market. The market is its own animal. Like a creature of God. You can't figure it out. Don't even try.

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