The Indian currency has already hit life-time low of 59.93/USD and it’s just a matter of time for it to break through the physiological level of 60/USD, warns Mitul Kotecha, Global Head of Currency Strategy at Credit Agricole.
Rupee's underperformance against its Asian peers is likely to continue in the short-term due to India's ballooning current account deficit, he told CNBC-TV18 in an interview.
The Reserve Bank of India (RBI) will try to contain rupee's fall to 60/USD level. But, the central bank's intervention can only stop the rupee from getting weaker to some extent, it can't reverse the trend, he added.
However, he expects the rupee to see some recovery by the year-end.
Below is the edited transcript of his interview with CNBC-TV18:
Q: How are you reading the moves on the rupee and what is your near-term target on the rupee versus the dollar?
A: The moves are a reflection of the increasing US bond yields. There is also a reflection of capital outflows from emerging markets (EMs) and also that the greater vulnerability I guess for the rupee has because it is underperforming currencies due to the fact that India has to finance its external deficit. Also, the rupee is suffering because of capital outflows increased this financing becomes more difficult. In terms of targets, the rupee will break through this 60/USD level and we avoid it moving through there overnight but I think it is inevitable that it will go through there quite soon.
Q: What are the global thinking heads of Credit Agricole and your clients telling you, this meltdown in capitulation that we saw across EMs in fact across all markets is the capitulation over for now and we will perhaps see more relaxed or slower downward drift hereafter or do you think a lot more losses are to happen in global asset markets?
A: I think we are only part way through the adjustments. We may have seen the worst in terms of severity but there is no doubt that capital is continuing to flow out of the EMs. I think Bernanke this week was fairly blunt, he was less dovish than markets had anticipated. He is very clear about what the intention is of the Fed and I think markets are going to transition into a phase of Fed tapering and its transition is going to be very difficult.
Q: Would rupee therefore be an underperformer compared to other emerging market currencies or after its recent sharp fall, it falls along with other emerging market currencies?
A: The problem for the rupee is that yes, to some extent it will fall along side other currencies but at the same time, India as I noted had to finance current account deficit (CAD) and unlike some other currencies in EMs and in Asia which have CAD surpluses, it makes the rupee more vulnerable to weakness. I do see again further short-term underperformance of the rupee. As I said, short-term but I think it will continue at least for the next few weeks.
Q: You spoke about the rupee being under pressure and breaching that 60/USD mark as well. Is the rupee level at 60/USD something we have to contend with perhaps many months maybe till the end of the year, what is the duration, the timeframe that you would give for rupee staying under pressure?
A: I would not say till the end of the year and our own forecast looks for some recovery by the end of the year. So, we would say that this is going to be a period of weeks as this difficult transition continues, it will mean vulnerability for a multi-week period.
Q: Are you expecting quite an active role by the Central Bank of India to protect any kind of level perhaps the 60/USD in the near-term?
A: That is exactly right. In the near-term, they will try and protect this 60/USD level. It is an important psychological level and it could spur greater losses if it is broken through. So I think there will be some defense of this.
However, that being said, I think if anything, the RBI will only be able to move the weakness rather than turn this trend around and bearing in mind where it is a general EM effect, sell-off in emerging market countries, sell-off in - it is difficult to turn one particular currency around in that environment.
Q: When the statements from Bernanke first hit the markets, from May 22 perhaps after that meeting with the US Congress, we are seeing the march out of a lot of FII investments in Indian debt. Do you think much of that is over or do you think we are going to see that balloon in to something considerable, I think there is about still some USD 30-32 billion of FII investment in some India debt, or USD 3-3.5 billion has marched out in a period of about 4-5 weeks? Is a great deal of that waiting to march out or do you think the worst is over?
A: I am not looking for a rout here in a sense that I do not think we are going to see a much more of an acceleration of this outflow, there will be more outflows no doubt but I do not think it is a mid-crisis, I do not think foreign investors are going to certainly look at this and completely reverses its big inflow that we have seen in the past months. So it is a partial reversal that we are looking for.