Nilesh Shah, who heads the Kotak Mahindra Mutual Fund and is also a part-time member of the Economic Advisory Council to the Prime Minister (EAC-PM), said that India’s performance on key parameters vis-a-vis trade partners will exert pressure on the rupee.
“Destiny of rupee is to depreciate because our inflation is higher than our trade partners and our productivity is lower than our trade partners,” Shah told reporters here.
Shah, a veteran in the MF space, added that a 2-3 per cent depreciation in the rupee is natural given the imbalances.
Flows can vary in the short term and influence the currency levels, but there is no room for the rupee to appreciate on a permanent basis, Shah said.
Given the situation on inflation and productivity, depreciation in the currency is also essential from an export competitiveness perspective, he said.
He added that the real effective exchange rate model also suggests a 2-3 per cent depreciation in the rupee.
Shah also appreciated the role played by the RBI, and said that the central bank lets the market determine the level of the rupee and intervenes only to contain volatility.
The direction of the rupee will be decided by the market, the EAC-PM member made it clear.
“Right now, based on the data disclosed by RBI, they could be short rupee forward in NDF (non-deliverable forward) and local market between USD 50 to 70 billion. So they have intervened to reduce… volatility of rupee, but direction will be decided by the market,” he said.
When asked if 90 per US dollar is the new normal for the domestic currency, he replied in the affirmative.
The level will be maintained even if India clinches the trade pact with the US, which has been negotiated for some time, he said.
Meanwhile, Shah also backed calls for a relook into the press note 3 — a government notification issued in 2020 to curb investments from neighbouring countries into India.
He said that India will have to find ways of attracting capital flows, and foreign direct investments are a very important means.
