The rupee took most analysts by surprise by touching 55.41/USD, a six month low on Tuesday. Agam Gupta of Standard Chartered Bank cautions that the Indian currency may slip below 54.50/USD by June.
"Our official forecast has been at 54.50 for June end. There is a risk to our forecast. But I don't see it going much higher than 55.75-56 in the course of the next three-six months," he told CNBC-TV18.
Meanwhile, he expects the Reserve Bank of India to intervene and sell dollar if the rupee sees a level of 55.5-56 in order to stabilise the currency.
Below is the edited transcript of Gupta’s interview to CNBC-TV18.
Q: 55.40/USD is where the rupee is at. We have been asking a lot of experts about their range or their expectations going ahead. Where do you see the rupee by say mid-year, by about June or so?
A: Our official forecast has been at 54.50 for June end. Obviously, the move has taken people by surprise. Primarily, the reason has been that people have been expecting a stable-to-appreciating bias for the currency and the trade deficit thus show that that the import demand still is strong in the month of April and probably in the month of May. So, there is a risk to our forecast of 54.50. But I don't see it going much higher than 55.75-56 in the course of the next three-six months.
Q: How are we placed in terms of the Indian Rupee (INR) movement as opposed to other currencies say our Asian peers, is there a higher volatility that we are seeing in the rupee depreciating vis-à-vis possibly the Ringgit or the Thai Baht? What is the correlation that we are spotting at this point?
A: If one looks at the month of May, the rupee has depreciated more against the dollar than the other Asian currencies, which primarily has to do with the fact that we have moved pretty rapidly in the last couple of days. So yes, we have weakened a bit more than the Asian currencies, but it is not substantially or significantly more.
Q: It maybe too soon, but do you think the Reserve Bank of India (RBI) will look to step in any point in time inorder to calm the markets by selling dollars or so, something that they have done repeatedly in the past?
A: Yes, the RBI will definitely be keeping a watch and their stated objective is to maintain stability in the currency market. They definitely will be looking to sell dollars between 55.50-56 to stabilise the currency, I think that’s pretty a much given.
Q: Just coming to the point that you don’t see the INR going down to levels of around 57, which was possibly the all-time low that we had for the rupee. What do you think would be the biggest support factors playing out for the INR going forward, which will be in its favour to support it at current levels or the range that you spoke about?
A: The biggest support factors are the capital inflows, both on foreign direct investment (FDI) and foreign institutional investor (FII). We have capital inflows both on equity and debt, so that’s one big positive, which we are seeing playing out and I think that will continue.
On the macroeconomic factors, inflation is coming off more than expected, so that is another positive for the currency. So, both these are going to keep rupee a bit supported.
Q: We do have an event later today in the evening. If the Fed Reserve Chairman drops even the slightest hint of reducing the bond buying programme, then to what levels do you think the Dollar Index could surge and consequently how do you think the rupee will react just for the immediate-term?
A: If there is a very hawkish tone from Bernanke today, then the dollar index will again breakthrough the 84.10-84.15 area. The rupee will also kind of follow suit and it could probably go to 56 in that case.
Q: Just focusing on the bond markets, could you just give us more details with regards to the withholding tax which was reduced to five percent yesterday for all debt across genres we do understand. Can you just give us how much of an impact it would have in terms of incremental flows from the FII basket into debt now?
A: There was nothing new that was announced yesterday. They are just some clarifications which were more or less on expected lines. So, the cut in withholding tax to five percent is a positive and one will see inflows coming in on that account. It is just that it is not going to happen overnight. It will play out in the course of the next three-six months. At the current moment, people are looking at the currency market also and if one starts seeing some stability, there then these inflows will start coming in.
Q: Just a word with regards to the tightness in the bond markets. We do understand that there has been some amount of hardening on the 10 year yield in particularly today because of the tightness in the liquidity adjustment facility (LAF) and not to mention there is no buyback announcement via the Reserve Bank of India (RBI) as well. Can you just throw some light with regards to what we can see on the 10 year?
A: The market is slightly disappointed that the buyback was not announced. The main reason why the market was disappointed is that the interbank liquidity does remain reasonably tight. The core deficit is probably between Rs 70,000-75,000 crore, which is very close to the one percent comfort level of the RBI. So, that little bit of disappointment has seen one basis points sell off.
The genuine demand for bonds is going to continue whether there is an RBI buyback or not. It is just that the level can move slightly. So, if RBI continues to not announce buybacks this week or next week, even then one could see the market selling off by five bps from here.