Happy Sunday.
It was a slow news week. Not that we are complaining. It gave us time to catch up on some reading and think about a few things.
One of these was the direction of the rupee. Two interesting notes on the currency markets landed in the inbox. The first was from Gaura Sengupta at IDFC First Bank, who is expecting the rupee to depreciate.
Globally, real yields in the U.S. are rising and we've dwelled on that for some weeks. These rising yields are never good for emerging market currencies. Locally, the rare current account surplus will reverse and higher commodity prices will hit home. If local prices rise then the inflation differential will also widen. All these factors are rupee negative, IDFC First said in its report.
All taken together, IDFC First expects the rupee to head towards 75.50/$ over the course of the year.
Rahul Bajoria at Barclays approaches the currency question more from the perspective of what the RBI will do and the central bank's balance sheet.
As we have said before, the RBI is holding on to the currency for dear life, lest it gets swept away with the rush of equity inflows, only to eventually fall-off a waterfall. Too much prose on a mundane matter of the rupee? Yes, okay, we agree.
Back to Bajoria's argument. He sees the RBI becoming slightly more tolerant of a stronger rupee as imported inflation picks up. This as India's foreign exchange reserves have risen to $584 billion and the forward book has risen to a record $55 billion. Bajoria also says that the multiple objectives of having a stable currency, a well-behaved yield curve, as well as anchored short-end rates amid a reduction in excess liquidity are now conflicting with each other. “Against this backdrop, the currency appears to have been ‘let go', notwithstanding the snapback amid a stronger U.S. dollar in the past few days.”
Bajoria sees the central bank let the currency float up to 72.10 levels by March-end. For the new fiscal, based on analysis of the RBI's balance sheet and the new economic capital framework, he sees the range for the currency at 74.3-80.1/$. This implies material currency weakness from current levels, despite an expected healthy balance of payments position, Bajoria writes.
In short, FY22 is setting up to be a year of rupee weakness. Not a fragile-five type drop but a more garden-variety depreciation. And that's ok.
We'll leave you with a few good reads from BQ this week.
As authorities dig deeper into the Franklin Templeton mess, there are allegations emerging that insiders sold large amounts of units before six schemes were wound down. A full investigation is pending but Menaka Doshi flags a missing link in mutual fund regulations that need to be fixed.
This week marked a year since the collapse of Yes Bank. Co-founder Rana Kapoor has been in jail this whole time. Vishwanath Nair went digging to understand the charges that are being levelled against him. Running a bank badly, in itself, is probably not a crime. The allegations are of kick-backs at least in three of the four cases and more may follow.
Finally, this story on the State Bank of Sikkim by Ridhima Saxena is all kinds of fascinating. A tiny mountain bank that continues to exist outside India's formal banking system, with a nudge and wink from the powers that be. If there was ever a ‘Dummy's Guide To Running A Bank Outside The Banking System', State Bank of Sikkim would make for an ideal case study.
Have a restful weekend.
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