Rupee likely to touch 39/dollar in June: JP Morgan Chase

We felt on the balance, there was probably less risk of that is happening because over the next month or so, there are quite a bit of cross currents that are going to impact liquidity. With the inflation coming off, it is quite possible that RBI wants to be a bit opportunistic and not necessarily overdo it.

One must not forget that there is sizeable bond redemption. There are bond issuances coming up as well and in middle of the next month, we will get into advance tax outflows. So given what happened in March, there could be an element of apprehension of not necessarily going that way again. But the bigger surprise to us was there was not even any announcement in terms of MSS issuances. So it is quite possible they are clearly trying to manage some expectations in the run-up to potential bond auction that is on schedule.

Q: Given as you said that they chose not to absorb any funds right now, does it raise the possibility of a CRR hike somewhere down the line in next 4-6 weeks?

A: I would not necessarily rule it out.

But I still think, the first protocol or the first line of defence is likely to be in terms of MSS than pressing the CRR button.

Do not forget we are back to the same old causality; if liquidity is pretty flushed and RBI goes ahead with CRR hike, then it raises the risk of other hikes as far as lending rates are concerned.

I have been empathic in saying that based on our call; RBI is done with hiking interest rates and increasingly, there is a bit of inertia in terms of hiking the CRR at every little issue. I would still think MSS is the way to go. I would not necessarily rule out CRR because it purely dependent on what happens to flows.

I think June is going to be interesting because there are sizeable FII inflows that are likely partly triggered by the IPOs that are on stream.

Q: That is the point. Because of that very big primary market pipeline, how do you expect the rupee and dollar to move in the near future?

A: Rupee is all set to break below 40; we think it goes to almost 39 in June partly driven by these pretty chunky inflows that are coming in.

With inflation coming off, it clearly gives RBI a bit more leeway in terms of intervention in managing the rupee. But I don’t think it is going to be anything as aggressive, that it would be needed to try and offset the downward bias on dollar-rupee because of these inflows.

So the rupee is certainly on track, at least in our view to break below 40, probably hit 39. Thereafter, the game plan is going to be more in terms of exporters, are likely to make much more noise.

Inflation is coming off and political liability that is necessarily seen between inflation and exporters will probably shift a bit. But that comes later in the year; we still have to see the rupee breaking below that psychological barrier of 40 and it is going to happen.

Q: What do you expect to see beyond that, because a lot of your global peers have been putting out reports saying that it is going to soften up a bit, but then it is moving towards 42 and maybe even 43?

A: That is pretty much we reckon as well; that the rupee will hit 39, and then thereafter partly as a result of the factors I mentioned, we see a bit of backup.

One thing that clearly all of us need to acknowledge is that the volatility in the dollar-rupee is going to be higher. So looking at Re1-Rs 2 move, it is not the way we would have looked at it a few months ago. It is large, given the kind of volatility that is likely to come about; it may not be outlandish at all. We still remain medium-term structural bulls on dollar rupee.

We just have to go through this so-called cycle over the next few months. We think the current move is likely to be overdone partly due to the absence of aggressive intervention by the RBI. Later this year when some of the constraints of managing or juggling the impossible infinity ease, they are likely to come back.

The conclusion that people should avoid is that the RBI is not going to intervene at all in the markets, which is totally incorrect.

Q: During last couple of weeks inflation has been just a few ticks above expectations, is everything on track given your expectations of the rupee going to 39 especially?

A: RBI is going to see headline - WPI inflation meets its comfort zone of around 5% by sometime in June while actual numbers have touched higher than expectations level and the broader trend of softening still remains intact.

Two issues still remain to be played out. These reasons totally justify our call on further improvements and break below 5% even on the WPI headline.

One issue is food inflation and the way to tackle that is going to be more a fiscal response rather than a monetary policy response.

Second, higher oil prices; when the rupee appreciation is clearly helped in terms of managing the rupee cost of that imported basket, further increases could clearly put pressure.

I think a hike in local oil prices is not likely any time soon and once again the government is likely to take more of a route in terms of trying to use fiscal measures rather than straight away pressing the monetary button.

I would emphasize once again, that it is not a consensus call, but more people are likely to jump on the band of wagon saying look RBI is done with hiking interest rates for the next several months.

Q: That is something a lot of bankers have said to us this quarter, they seem quite sanguine that rates have stalled for now. Is it just inflation that they are watching or has something else changed?

A: No, people still have underestimated the kind of exceptionally aggressive tightening we have seen over the past 6-7months. This is happening when the main indicator that you highlighted in terms of market guidance headline - WPI is coming off. Within that, manufacturing side seems to be well behaved as well.

Are we out of the woods as far as the whole inflation dynamics are concerned?

That is going to stay in the RBI’s hand for the next several months.

A: We still continue to emphasize that the next move in the US is likely to be up rather than what markets have been thinking in terms of a cut. Incoming data in the US has clearly surprised on the upside and that has prompted market expectations to shift. It remains still a big call whether or not the Fed hikes interest rates, but markets are clearly shifting from the earlier view of a cut and maybe two cuts to now increasingly thinking that the probability is going down.

What we will find as we get more incoming data for the second quarter - clearly the manufacturing side is beginning to look better than the kind of a drag, we saw from the housing correction. Both those factors are going to present a better recovery in the second quarter as far as growth momentum is concerned.