The severely battered Indian rupee is likely to further weaken to 61.5 against the dollar in 3-4 months, says Ray Farris, director, Credit Suisse. He warns the currency can touch 62 over the next year.
Farris says the countries that have large current account deficits(CAD) are more affected by the cues from the US. On Wednesday, Fed chairman Ben Bernanke said the quantitative easing would be taper off by next year and this change, according to Farris, will lead to a portfolio rebalancing and weakening of currencies.
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"It is not so much an issue of whether the money is leaving the country but if one has a large deficit that needs to be financed, they need money to continuously come into the country. All one needs is money to stop coming in and the currency is going to weaken," adds Farris in an interview to CNBC-TV18.
Below is the edited transcript of Farris’ interview to CNBC-TV18.
Q: Do you think 60/USD is it or the rupee is setting itself up for more damage in the days to come?
A: We think the rupee is probably going to trend higher. We forecast it to go to about 61.50/USD over the next three-four months and over the next year up to about 62/USD.
Q: What is your sense of what is underway right now, an observer earlier was pointing out that there is a big carry trade problem underway from many of these emerging market currencies, is that what is causing this much unraveling in such a short period?
A: There is certainly a portfolio rebalancing issue right now. So, interest rates in the core system in US are changing and that forces one to reprice assets all over the world. Part of that is leading to a reduction and people’s holdings in fixed income assets and that is affecting everybody.
The countries that have current account deficits (CAD) and particularly large deficits are most affected. It is not so much an issue of whether the money is leaving the country but if one has a large deficit that needs to be financed, they need money to continuously come into the country. All one needs is money to stop coming in and the currency is going to weaken.
Q: How soon do you expect 61-62/USD kind of level to come for the Indian rupee and just by extension of that how meaningful do you think any pullback would be, what kind of levels can the rupee hope to recover to if at all?
A: I guess there are a couple of issues. In the very near-term, all markets are getting to a point where they are oversold. Technically, in the short-term, we could trade a bit about 60/USD and we can then have market come down in the core of the system, the rupee could rally back a bit.
I think the real message here is that India has high inflation. Though it has come down a bit, we think it will come down a little bit further and maybe the summer monsoon will help, but we think growth is accelerating and we do not think inflation is going to stay low. So, we have got consumer price index (CPI) inflation bottoming at about 8.5 percent in Q3 and then beginning to pick up again.That is substantially above the rest of the world. That in a bit tends to weaken a currency a few times.
The next issue is the huge current account deficit (CAD). We are somewhat optimistic. We think it will be about USD 73 billion this year but we think next year, it is going to rise over USD 90 billion. It is a huge amount of financing that India needs.
On trend, we think if the currency weakens, it could go up a bit, come down in a global correction. We think over the next three months, we are probably going to trade above 60/USD towards 61-61.50/USD and over the next year to 62/USD.
Q: Is India also likely to be vulnerable to the same kind of outflows that you have seen in many other emerging markets from the fixed income side from global investors or do you think that is not as much of a problem in India?
A: It already is a problem to some extent. India has much less foreign investment in bonds, in fixed income than other countries. That is a result of the fact that it always had quotas on foreigners’ ability to invest in India. There is still money that can leave. A lot has already left though not as much as other countries.
What is really necessary to stabilise the currency is to get inflation down and keep it down and get the current account deficit to a much easier to finance level. I think those two things are highly related because it seems to me that the reason why people are buying gold so aggressively is that they are worried about inflation. They view gold as a hedge to continual depreciation in the value in the currency even domestically.