Linkages like PayNow-UPI have great potential to help rupee: Jamal Mecklai

In a Q&A, the CEO of Mecklai Financial Services dwells on issues such as rupee internationisation, stronger FDI flows and RBI's role in keeping the Indian currency stable

Last year, the RBI took certain steps to further internationalise the rupee, but Jamal Mecklai, CEO, Mecklai Financial Services tells Bhaskar Dutta in an interview, that the recent move to link Singapore’s PayNow with India’s UPI is a far more exciting measure as it plays to India’s strengths and holds great potential in making cross-border flows efficient. Edited excerpts:

In July 2022, RBI announced steps for further internationalisation of the rupee. There has been much global debate about ‘de-dollarisation’ as a theme. By when do you think we'd see meaningful internationalisation of the rupee?

I think it’s going to be a long time. Using it for trade in a few narrow channels is all very well, but the bulk of our trade is in dollars, euros and yen. Now, that change is going to take a long, long time – our markets need to be much more liquid. It’s important, but I’m not sure of how critical it is. I will say one thing though – more exciting than the internationalisation has been the step on UPI with Singapore. That’s really India’s strength. That would be really great – if we could get hooked into using our systems for cross-border flows. That should make everybody more efficient.

The experience of 2022 shows us that it is risky to predict an end to the Fed’s rate hike cycle. Where do you see the rupee over the next couple of months?

I think fundamentally, the Fed is the main game in town. My personal belief is that there is a bigger problem. The bigger problem is that the Fed and recently, the ECB, repeated that they’re going to do what it takes to bring inflation down to two per cent. Because I think the two per cent target was set on a different planet. It was set when globalisation was smooth, when China was selling things as cheap as they could. We’re certainly not in that world now. So, I don’t think they’re going to be able to get inflation down to two per cent. They will get it down as they continue to hold rates up, but to my mind, the terminal rate, the target, needs to be different. Now the big problem is if the Fed, any day, says, “Okay, I’m not going to take it to two per cent, I’m going to take it to 3.50 per cent," markets will lose their mind.

So, I think some major trauma will come out of that. Now, of course here in India, the rupee is what we’re looking at, and whenever there is this kind of dramatic nervousness, risk-off etc etc, naturally, people pull money out from everywhere, including India.

Plus, we have this continuing problem with our current account. Now, on the other side is the RBI, where at every meeting, Mr Das says, we can manage it. And they showed their muscle, more particularly recently. Despite the whole Adani story, the rupee did not fall below 83.

It’s dangerous to think they can hold it forever. On the other hand, if you really look at purchasing power, the economists and the think-tanks, they said the rupee is 40 per cent undervalued. So, I think it’s good that the RBI is preventing it from weakening. How long will it be able to hold the tide? I don’t know.

The other important thing to realise is that despite it all - we have our problems - India is still a great place to invest. I read some numbers recently that suggested that FII flows and FDI flows were more or less on par. Earlier, FDI used to be much much lower. So, maybe FDI is going to take over the running. That may be what will keep the rupee steady, in that fashion. So, where it’s going to go – 83/$1 appears to be a very strong support.

I think the bigger issue facing corporates right now, particularly exporters, is that premiums have fallen very sharply. With premiums of one rupee 50 paisa for a year, it makes no sense to sell (dollars). But, by the same token, you can’t sit exposed. Let’s talk about importers now. There are some professional companies that always hedge. For them it’s great, it’s even cheaper. But if you really look deep into the market, you find that even though there are low premiums, there have been many occasions when the rupee strengthened a lot. So, you’re missing out on a lot of opportunities.

The year 2022 was one of large FPI outflows from equities and so far FPI activity in 2023 has been volatile. India’s GDP growth is expected to slow down. What can we expect on flows?

Portfolio flows are going to be driven by risk-on, risk-off overseas. As far as India’s GDP growth is concerned... the reality is that you’ve got a huge market, lots of opportunity, so I think FDI is going to be strong.  

Whether it’s going to be able to increase faster than the drop in the portfolio flows, I don’t know. It’s going to be tricky, that’s why when we come back to the rupee, how well will the RBI be able to handle it? They seem to be doing a good job right now. In fact, one of the things here is that the model we talked about uses volatility. Now, the RBI has been containing volatility.

The broad consensus seems to be that India’s current account deficit would reduce in the next financial year. Would that place the rupee favourably amongst EM peers?

Well, obviously, we are a big commodity importer. A lot of the other emerging markets are exporters although a good few are importers as well. I don’t know compared to other emerging market peers, but the lower CAD should give a little relief to the RBI as they ride this wild horse.