Jayesh Mehta on rising dollar and its impact on rupee and bonds

But yes, more than the local weakness, there are the FPI outflows. It is more about flight to safety. Rest of the US has been weak, but the dollar index is thriving and we are going to see that impact on the rupee too. I would say it is more of an external dollar strengthening than an increasing rupee weakening situation at this juncture.

Nothing much is really supporting the rupee. The velocity with which foreign investors have been selling is a matter of concern and there is a lack of IPO flows also. We are seeing some intervention by the RBI. Can you confirm if we are seeing a central bank support the rupee?

We have been hearing about it. At every level, they were there. Yesterday, people were expecting intervention because there was a future expiry. But I think it did not intervene as much as the market was expecting. What I am trying to say is they will see at what level RBI intervenes heavily.

On the macro, we are not seeing the FPI flows, we are not seeing the IPO flows. But overall, we are doing fine. Of course, oil is a worry on the current account but we have pretty good reserves and it will depend on the RBI. As I said earlier, the market will see where the RBI is going to put – if any – hard stop. Of course, RBI has been doing what they have been saying which is they do not want to put a number in mind. When there are sharp moves, they want to intervene at that point of time and they have been doing that. But as I said, earlier we thought 79 is the limit but now till the dollar strengthening continues, we do not really can figure it out a number.


But the other way to look at it is that Indian currency has been much stronger than other emerging markets. We have not depreciated as much as the likes of Argentine peso or the other currencies when it comes to EM. Is that something to take heart from?

You are right. Why only emerging markets, we have performed better versus dollar compared to even the developed market. We have depreciated much less and that shows the strength of our reserves. Right now, with high reserves, we are not in a situation like 2013. From that perspective, we definitely have done better than other countries.

But it is more about dollar strengthening rather than any other country. A lot of other countries, particularly the developing world have been quite weak and that is going to impact our rupee.

On the bond side, very surprisingly, in the last few days, the bond has been very stable. The government 10-year is roughly at around 7.45-7.46%. Overall, purely on yield term versus inflation, 7.46% is well priced. It is a good level to enter, but irrespective of the Ukraine war, we had another issue of supply and at some point of time, we will have RBI to support that.

So purely from a value perspective, 7.46% is good but can it go higher. Maybe it will be the same thing for the rupee where RBI will put their hands up for next two months. We will see the yield inching up slowly unless there is a $20-25 fall in oil but even after that, it may move 25-30 bps but because of the demand-supply dynamics, we will slowly see the yield inching higher. By August, we should peak out on the yields, maybe 0.25% higher or so.

How to explain the ferocity of the move that we have seen on currency over the last couple of days? What is the underlying trend here?

We have seen in the past that when there are large moves, RBI intervention comes in. What we hear is the central bank using multiple markets. Of course, we do not have any confirmed data source as of this time but they are using spot intervention, spot forward FX and so from that perspective, we do not know what exactly they are using. This is all just hearsay. We do not know what they are using but definitely the impact of spot intervention typically has more weightage. That is what the market was expecting and it has not come in yet particularly, in the last two-three days.

So I think at 79, the market will try and test out whether that intervention is there or not. If not, they will try to take it little bit higher and that is what the market will do in both bond and rupee. The rupee particularly would be more dependent on what the RBI stance is going to be in terms of intervention. They are very clear that they are not targeting level but they will definitely make that volatility low.