HDFC Bank Ltd.: If rupee crosses 70, outflows will be triggered: Tushar Arora, HDFC Bank

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Both growth and inflation should be comforting for markets this time, Tushar Arora, Senior Economist, HDFC Bank, tells ET Now.

Edited excerpts:



How do you think the move in Turkish Lira would have an impact on flows? Do you think it is a meaningful one considering we are quite dependent on the emerging market flows?


Turkish Lira has come down and it has affected the emerging market sentiment in general. We are seeing some pressure on rupee also since morning. But having said that, our dependency and our elasticity and sensitivity to such moves is kind of low compared to other countries in the emerging world. We should be getting impacted but not to a degree that some of the markets in South America or Latin America might get affected which are more prone to external risks. They have higher degree of external debt in their balance sheets. We are relatively safe but some of the impact might be felt.

When do you see the situation in Turkish Lira stabilising or do you see it getting worse in the near term, going forward have a rub-off on other EM currencies as well?


Your question is pertaining to the fair value of the rupee. There is a lot of debate on that front. There are multiple measures which will help us gauge the fair value of any currency. If you refer to RBI’s measures, the real effective exchange rate then the fair value would be more than 70, around 73-74. The overvaluation is pretty high if we go by the RBI’s measures. But if we go by the BIS and some of the international agencies which come up with similar measures, overvaluation might be very low and relatively close to current values.

We have also done our own analysis on this front and we assign higher weightage to emerging Asian countries. For example, we assign a higher weightage to China and some of the countries which are emerging as major trading partners and competitors for us. Going by that valuation, I think the fair value of rupee comes out to be around 68. We are roughly in the safe zone. There is not much to worry if we go by that assumption of 68 value for the rupee. But if it crosses 70, then a lot of outflows are triggered. It triggers a risk-off sentiment in general leading to a lot of capital outflows. That is something which needs to be protected.

At the same time, going by the fair value analysis, exporters are relatively safe, but you need to control imported inflation. You need to protect capital outflows from that angle and RBI is cognizant of that fact and to a certain degree, the last rate hike was partly to control such jitteriness as well.

Manufacturing is likely to stay at sub-4% levels. Is that a matter of concern?


If you look at the sequential momentum for June, mining, manufacturing and electricity are seasonally weak at this point of the year. There is rain and there is lot of seasonal element which leads to sequential contraction in all three items. But what we have noticed this time is that contraction might be less than what the past trend has been.

So yes, overall the headline reading might remain somewhat weak but the contraction on a sequential basis is less than what it has been in the past what the history shows. Our headline forecast is also somewhere close to the consensus. We are expecting a reading of 5.2% for the IIP overall and I think that is a decent jump from last month’s reading. Both growth and inflation should be comforting for markets this time. One would expect the IIP number to go up, the inflation number to go down. Headline numbers growth and inflation mix this month should be cheering for the markets.

You would be tracking a lot of largecap companies numbers. On an aggregate basis, at micro level, numbers were not picking up. Do you think aggregate numbers would pick up? Do you think overall the results will start to come better?


Better results have already started coming and a lot of largecaps are performing well. Even if you look at the systemic level of credit growth, large industries are showing a good degree of uptick in terms of credit numbers but it is really the small scale industries, the SME sector which is still not back in a full volume. That takes a bit of time. GST and a demonetisation had a very deep impact on the SME sector. They are gradually recovering and may be by end of this year, we should see all the numbers improving, even the corporate sector results.





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