Ananth Narayan, managing director, co-head of wholesale banking, South Asia, Standard Chartered Bank said the weakness in rupee is responsible for the unwinding of positions but the currency is unlikely to breach 56/USD soon.
Justifying his bullish stance on the rupee Narayan says the rupee fundamentals haven't changed. "The reality is that all the good news still remains. We still have a large anecdotal FDI flows to come through, whether it is through Unilever or Bharti. We still have FII demand on the anvil. Personally, I suspect that the numbers will come off over time," adds Narayan.
The only factor that could pose a risk to the rupee is the political uncertainity, adds Narayan. "The risks are that as time goes by, we come closer to the political uncertainty of election and the second part is that the market is really hoping for some good news on the infrastructure projects front, whether it is CCI or the approvals of the large projects and that is frankly taking a while to come through," elaborates Narayan in an interview to CNBC-TV18.
Below is the edited transcript of Narayan's interview to CNBC-TV18.
Q: Bad days for the rupee so far. What kind of near-term targets are people talking about?
A: Yes, it has been a couple of bad days for the rupee. It looks like we still remain in the 53-56/ USD range that we have been calling for since the beginning of this year. I do not think the rupee range has broken out of that as yet.
What we are seeing currently is unwinding of some positions which had been built up in the last month and half or so on the back of some positive news for the rupee. Things like the March trade deficit which is a good number, the anecdotal FDI flows, commodity prices, gold being down, withholding tax being removed or reduced; all of that has prompted some amount of rupee long position to be built over time and given the global dollar strength, some of that is being unwound. But I do not think we will move out of the 53-56/USD range and we are probably at the top end of the range right now.
Q: Would you say that this is just a technical issue right now, nothing more fundamental than that? A lot of people have been surprised at the recent weakness given how the fundamentals have been shaping up.
A: Absolutely. I am on the list of the people surprised. Frankly, this was building up. The fact is, a lot of good news was being digested by the market and positions were being built accordingly.
I do not think fundamentally, the range has changed. I do not think the story has changed. The reality is that all the good news still remains. We still have a large anecdotal FDI flows to come through, whether it is through Unilever, Bharti. We still have FII demand on the anvil. The e-auction that happened two days back went off pretty well. The withholding tax reduction is a long-term positive. Personally, I suspect that the numbers will come off over time. This momentum will not sustain. Oil prices remaining atleast well-behaved again is a reasonable positive.
The risks are that as time goes by, we come closer to the political uncertainty of election and the second part is that the market is really hoping for some good news on the infrastructure projects front, whether it is CCI or the approvals of the large projects and that is frankly taking a while to come through.
Barring that, we still remain in a reasonably positive range of 53-56/USD. We cannot forget the fact that the interest rate differentials are fairly favourable to the rupee. As we come closer to 56/USD on spot, the outright forward for one year comes closer to 60 which is a reasonable level really. So, fundamental view has not changed from 53-56/USD.
Q: It could be a reaction to the recent weakness, but some technical traders and market watchers are beginning to talk about that 60 mark. Is that within the realm of possibility?
A: One must never say never. If anything has been learnt from the last few years, it is exactly that. Can this happen fundamentally? Absolutely. Can it go beyond the last weakness of 57.30-60? Yes it can. Is it a base case expectation? I do not think so.
There have been a lot of positives in the last few weeks and months and that should sustain. At 56 plus it becomes very good level for fresh investments to come through to the country especially given the interest rate differentials, so, I do not think that story has changed, but risks always remain and every risk manager has to be aware that the need for insurance is still on.