After the US Fed paused on rates, the question that investors are asking is whether monetary policies can ease global volatility. Where does the RBI’s monetary policy and forex management fit into the equation? Bloomberg TV India caught up with Bank of America’s Managing Director and Country Treasurer for India, Jayesh Mehta, to get a perspective.

What did you read into the Fed statement overnight that raised concerns and risk in global economies? Equity markets are interpreting it as no rate hike in March. Does it signal further derailing of global economic growth and a bigger worry coming ahead in 2016?

I think they have taken into cognizance the global markets outside US. And of course it (rate hike) has been postponed. But at the end of it I think the dovishness was not as per the expectations of the market. The market was expecting much more dovishness in the statement, which didn’t materialise. So we are seeing the dollar strengthening across currencies and that continues to happen. And that is one of the reasons you have not seen immediate cheers in the emerging markets currency. So, from that perspective, it is more about expectation. It was dovish but not as dovish as the market was expecting.

What does that mean for the dollar from here onwards? The rupee has been under tremendous pressure and we have gone from being one of the best performing currencies over the last two years to a consistent underperformer. Is it the much needed depreciation or do you think it is accelerated by the fact that we have sort of outperformed?

I think it is more to do with the flows, particularly equity flows, and that has not been that great. We are suffering pain along with the other emerging markets because of the allocation to emerging markets and then India gets a sub-allocation. So I think that even from the flow point of view we hopefully are more or less done. So that pressure, if the outflow still continues, will sustain but as of now it does look that we are more or less at the toppish and maybe the rupee can go to ₹68 to a dollar. But does it go to ₹69 to a dollar? Chances are not that great at his juncture.

What does that mean in terms of RBI monetary intervention?

I think what the market is expecting is a quarter per cent rate cut. Maybe there are a few probable 10 per cent chances of 50 bps rate cut. But more than rate cut — we had enough rate cuts last year — what we really require is liquidity. And there are two ways — CRR (cash reserve ratio) and OMO (open market operations) purchases. I think there would be a large number of OMO purchases coming through given the liquidity being so negative. After the last two supplies, the shortage is like ₹1.6 lakh crore. You need huge liquidity injection coming into the system.

And hopefully in the RBI policy, it doesn’t look like there will be a CRR cut. But if they do it, I won’t be surprised as well. More importantly, we could see a series of OMO purchases post- policy because I think just one week before the policy the second OMO purchase would be a little difficult.

But after the policy, we might see a series of OMO purchases coming almost every week. And that should give a lot of fillip. If you really look at it, after 125 bps rate cuts in 2015, we are still at what we started in January 1, 2015, in terms of 10-year yield. And the last two months, after the 50 bps cuts, there have been too much of bond supplies, particularly the State government and discom bonds.

Too much of supply is coming into the bond market.

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