Indian five hundred rupee banknotes are arranged for a photograph in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

Despite Steep Fall, No Sign Of Panic In Currency Markets: HSBC’s Hitendra Dave

The Indian rupee’s 14 percent decline in 2018, which has now exceeded the depreciation during the taper tantrum of 2013, has certainly grabbed headlines but there is no sign of panic in the markets this time around, said Hitendra Dave, head of global banking and markets at HSBC India.

The noise around the currency depreciation is overdone, Dave told BloombergQuint in an interview, adding that the fall in the rupee should not be seen a risk to financial stability.

Apart from the difference in the macroeconomic conditions between 2013 and now, Dave points out another point of distinction — the increase in hedging by corporations.

“I haven’t sensed the kind of panic that was there in 2013 and 2008,” Dave said.

One reason for that is that I think the unhedged forex exposures are now better managed. I think the RBI has been saying time and again that forex exposures should be hedged, banks are being penalised for unhedged forex exposures of their clients and that appears to have worked.
Hitendra Dave, Head-Global Banking & Markets, HSBC India

In 2013, a lot of companies which had borrowed significantly in dollars were taken aback by the sudden weakness in the rupee. That led to “stop-loss hedging” which led to panic-like conditions in the market. “This time we are not getting any such panic calls,” he said.

After the experience of 2013, the RBI came out with rules that required banks to set aside more capital and higher provisions against companies that have not hedged their forex exposures. This was an indirect way to ensure that companies hedge, since the RBI has no direct control over corporations. The RBI does not release regular data on the proportion of unhedged exposures but most in the markets believe that corporates are now being more prudent in their hedging practices.

Depreciation Not Over Yet?

Earlier this week, HSBC Research revised its forecast for the rupee for 2018 and 2019. The rupee is seen at 76 against the U.S. dollar by the end of 2018 compared with a forecast of 73 earlier. The forecast for end of 2019 has been marked down to 79 against 74 earlier.

The research house cited a “shrinking yield advantage” and the RBI’s apparent willingness to accept greater rupee weakness as reasons for the change in forecast.

Dave also believes that the approach of limited intervention pursued by the RBI is appropriate at the current juncture. He explains that the nature of the deficit, which is created by the widening of the current account gap, is more permanent in nature. As such, expending forex reserves to stop the fall may be futile.

You have to come to a conclusion on whether the CAD widening/portfolio flows reversing... whether this combination merits currency weakness. If you come to the conclusion that currency correction is part of the solution, then allowing the currency to go by and large in line with flows is the right decision.
Hitendra Dave, Head - Global Banking & Markets, HSBC India

Dave does not believe that raising interest rates would have helped draw in more debt flows into the economy. It is simplistic to assume that raising interest rates by 25-50 basis points will mean that investors will ignore the impact of factors like higher oil prices on the economy, Dave said.

“We are in for the the long haul. We should not use significant reserves or significant schemes (such as NRI bonds or deposits) unless you feel the market is getting ahead of itself. And I don’t think it is getting ahead of itself yet,” Dave added.

NBFC Strain

Commenting on the strains in the NBFC sector, Dave said that companies in this business should prepare to have lower dependency on the commercial paper and corporate bond market for the rest of this year. While market conditions have improved since mid-September, it is a “nervous calm”.

Defaults by the Infrastructure Leasing & Financial Services group have led to risk aversion towards the NBFC sector. Fund flows to this sector are perceived to have slowed down despite the RBI taking steps to ease system liquidity.

The RBI has assured liquidity to the wider system and linked that to the state of the financial markets, said Dave. “The challenge will be if you see that there is so much risk aversion that money doesn’t flow to the NBFCs.”

The next 30-40 days are important to see whether the sentiment around NBFCs stabilises, said Dave, adding that they should be looking to raise funds through loan portfolio sales and use bank lines of credit in this period.

We need to be prepared for a contingency plan because there is no lender of last resort for NBFCs. At this point there is no need for it, but I would keep that plan ready in my pocket.
Hitendra Dave, Head-Global Banking & Markets, HSBC India

Watch the full interview here: