See Re trading at 39/$: BNP Paribas

Hans Redeker, Global Currency Strategist, BNP Paribas, is positive on the rupee. "The rupee should go down back again to Rs 39 per dollar. The outlook for the Indian currency is pretty much dependent on the global credit outlook. Most capital inflows into India have been coming via capital markets. We have portfolio and debt-related inflows, which is not steady. That is not long-term, so this can be reversed anytime. That means that stability of this flow will pretty much depend on central bank policy. The market is not going to tolerate loose conditions with inflation rising at above 11%. This is a big negative."

Excerpts from CNBC-TV18's exclusive interview with Hans Redeker:

Q: Crude is currently trading at about USD 141 per barrel. A lot of developing countries are having food and energy costs as a significant proportion of their CPI basket. If you had to break up developed versus developing currencies currently, how do you see them performing? Do you sense there will be some sort of outperformance in developed currencies going forward?

A: The emerging market environment is much more dependent on crude, and energy. In China, about 80% of the CPI increase can be attributed to crude and energy, and that compares to a very low rating in UK, Germany, or Euro zone.

What we have to look at is the Asian inflation rate, the movements and outperformance of inflation, its impact on economic growth, and the possibility to develop a second round of effects. What we need in Asia is a very prudent Monetary Policy. We had been arguing for a long period of time that the linkage and under weightage of Asian currencies to the dollar was responsible for this wave of liquidity and allocation of capital in financial markets.

That was responsible for the problems that we are currently seeing in credit. When you look at credit spreads widening in the US, Europe etc, the financial sector is seeing huge stress. We have to ask our selves what are to be these implications. If this means that credit is going to be less available in future, then it is going to be the case. In total, it means that globally we are not seeing a de-coupling but a downturn in economic activity. With that, you will sooner or later have an impact on commodity markets.

The key on this is that at what pace we are going to see from the emerging market environment subsidy cuts and the bigger elasticity is the commodity market to changes in economic activities. So far, we haven't seen this elasticity but in the second half of this year and we are going to develop that and therefore I as well assume that the commodity prices in the second half will be less hot.

Q: If the ECB does go and hike rates in July, which it is expected to do, that would put more pressure on the dollar and thereby lead to spiraling oil prices from those levels?

A: The European Central Bank wanted to build a parabolic and second round effect. This is how we have to interpret the rate hike in July. That means it's not going to be a series of rate hikes. It's one-off. Then, the European Central Bank is going to reach a plateau. The economy is weakening significantly, with orders declining for five months in a row. The last time it happened was in 1992. At that time, the German Unification boom went into bust. We have to consider a significant weakening of the European economy and that might force the European Central Bank to re-think its Monetary Policy strategy in the second-half of 2009. From that point in 2009, we might have to deal with a weaker Euro going forward.

Q: What are your year-end targets for the Rupee? What is your expectation of RBI action going forward?

A: The outlook for the Indian currency is pretty much dependent on the global credit outlook. Most capital inflows into India have been coming via capital markets. We have portfolio and debt-related inflows, which is not steady. That is not long-term, so this can be reversed anytime. That means that stability of this flow will pretty much depend on central bank policy. The market is not going to tolerate loose conditions with inflation rising at above 11%

. This is a big negative.

Q: In terms of pure levels from December 2008, what is the dollar-rupee level that you are looking at? Given the strength of the euro, what is the euro-dollar level that you are making?

A: I hope the central bank is doing the right thing on the rupee. I am positive on the rupee. The dollar-rupee should go down back again to Rs 39. The dollar is going to have a much firmer testing. So, by the end of this year, we should be trading the euro-dollar at USD 1.45.