Strong resistance for Re around 42 levels: Citibank

Sunil Kalra, Director Head-Trading, Fixed Income and Currencies of Citibank India believes that 41.80-42 levels for the rupee are strong technical resistances.

If excessive volatility does take place, he expects the Central Bank to intervene and at least slow the move if not try to change the uptrend.

A: In the recent past, we have clearly seen twin deficits, which are primarily the current account and fiscal deficit, and these are being talked about a lot more than we ever spoke about in the past.

High oil prices and uncertain global equity markets are primarily the reasons contributing to it. We are now forecasting 2.8% as the current account deficit, as a percentage of GDP, vis-à-vis 1.4% we spoke about earlier. That coupled with a lot of oil demand in the market as well as market players getting out of strategic short positions has definitely led to a very nice 3-4% upmove in currency markets.

What has been conspicous is the absence of strong Central Bank intervention to stop such a runaway move up. Historically, they have always said and acted to contain excessive volatility. But so far in this move we have not really seen the kind of offers we see on the dollar like we normally see in this fast move.

I think going forward it is critical to watch out for any signs of the Reserve Bank intervening on the sell-dollar side and if they do come into stock or at least try to slow the move. In the absence of that when oil prices are at USD 125/bbl, the macroeconomic scenario definitely has changed.

Talking about slowdown in capital inflows-thanks to uncertainties in the equity markets, we definitely have a much more two-way market now than we have had for the last couple of years.

Q: Just to get back to near-term targets, do you think 42 is the mark that most traders are looking at for this week and at that point are you expecting some kind of Central Bank intervention?

A: Yes, I would think so. I think it has been a pretty sharp move from 39.90 onwards and 41.80-42 levels are anyway strong technical resistances on the charts. Central Bank has clearly said a lot of times in the past that they do not like excessive volatility so we would expect them to come in and at least slow the move if not try to change the uptrend.

Q: How much of a scaleback do you expect if things scale down, 42 is the moving target on the upside, how much do you expect the rupee to cool off to?

A: I think on the downside first level should be around 40.80-40.90, we held that level twice before we finally broke through on the upside. We expect that if the dollar does fall to those levels we will see a lot of importers and probably some loan hedges coming into hedge their books. So I would say 40.80 to 40.90 should be the support.