Robert Prior-Wandesforde, Credit Suisse believes that the weakness in the Indian rupee is an indication that India still requires a lot of inflows. Last week S&P reiterated its negative outlook on India, after which the rupee weakened all the way to 55 against the dollar.
According to Prior-Wandesforde, the Indian currency is likely to see short periods of currency strength followed by significant periods of weakness. "In 12 months time or by the end of the current financial year the rupee will be softer than it is now, perhaps in the order of 56.5-57," he told CNBC-TV18 in an interview.
Below is the verbatim transcript of his interview to CNBC-TV18.
Q: After what you saw in the April inflation tick with that decline to below 5 percent do you think there is more elbowroom for the Reserve Bank of India (RBI) to cut rates in the next policy itself?
A: Not necessarily now. I think the wholesale price numbers were certainly a necessary condition for a cut, but probably not a sufficient condition. The RBI has made it crystal clear that it not only needs to see weaker wholesale price inflation, but it also needs to see a few months of weaker consumer price inflation.
We have one better number, but that is it so far. Of course an improvement in that current account position and the April trade deficit numbers were frankly a major disappointment. It is going to need to see two or three months of better data before cutting. The most we will get at the June meeting is a Cash Reserve Ratio (CRR) reduction. I think the next repo rate cut will come at the July 30th meeting.
Q: The big news on Friday or last week was basically S&P just about reiterating their negative outlook on India. What did you think of it in terms of one in three chance or the possible 33 percent chance that we could be downgraded in the next 12 months?
A: I think it is more the same. S&P has taken a fairly cautious view. I think the Finance Minister may have been whistling in the wind a bit if he was really hoping to persuade these rating agencies to upgrade India. That may have been a little bit too much, but likewise I think the S&P are basically saying well look some progress has been made.
However, we do not know how long lasting that is, particularly in terms of the public finances with the general election coming up. We do not know whether the CAD is really turning the corner. As I mentioned the last number was not particularly good. These rating agencies also pay quite a lot of attention to growth. They would like to see growth picking up because that helps the denominator in these ratios, budget deficit and current account to GDP.
So far there is not a huge amount of evidence for that. They tend to be reactive, they have to see some convincing evidence of better data before they act or worst data before they downgrade.
I think they are pretty firmly on hold. I do not expect a change in the next 12 months. I do not expect a change before the next general elections.
Q: Finance Minister believes that despite what the S&P said India deserves an upgrade at this point. He did make comments yesterday where he indicated that more steps will be taken in order to curb gold imports. What are your thoughts on how much gold imports could fall in FY14 and in effect how much it could alleviate fears with respect to the CAD or reduce the deficit?
A: So far so bad. We are already one month into the financial year as far as the data is concerned. We saw the most extraordinary rise in gold imports. It was something like close to 114 percent Year-on-Year on the back of 15 percent fall in price. We just see how sensitive people in India are to even a fairly minor drop in the gold price.
Further restrictions are very clearly required to change this trend around. The big issue for the central bank is not just the amount of money being spent on gold imports and how that impacts the external position, it is also the extent to which this gold buying reflects ongoing inflation concerns in the country.
To what extent is it being used as inflation hedge within India? Clearly the RBI has to focus on that. I do know if it is the answer to your question. I do not know how much gold imports will be down, I am not sure they will be down in this year. It depends on what exactly the government does.
Q: We have seen a strong rally come into the old 10-year. Where do you see the 10-year stabilize? From your analysis in terms of the past couple of data points do you think that there could be some amount of increased interest in something like an inflation indexed bond which is going to be released by the RBI come June, the first tranche at least. Do you think that that could possibly curb investment towards other asset classes such as gold?
A: That is an interesting move, the index linked bond and I suspect it could well be quite a success in a country like India which has been prone to the high inflation. My guess is that it will moderate gold demand to an extent, but I do not think it is going to spark a fundamental change in buying habits of gold.
On your first question in terms of the 10-year yield, our bond strategist remains bullish. The fundamentals in the short-term by which I mean the next three months or so still look pretty good. Headline inflation is going to come back below 4 percent. Core WPI inflation is going to drop to at least 2 percent. We are looking for another 50 bps of rate cuts from RBI. It is hard to be bearish about the bond market under those circumstances. We could well see a further 10-15-20 bps off of the 10-year from here. Beyond that it could be a bit of a struggle.
Q: What is peculiar is the fact that despite so many billion dollars of inflows coming into India the rupee has seen no great recovery. Post the S&P downgrade fears the rupee has weakened all the way to 55. What is your view at the trajectory that the rupee could take from here?
A: I guess what this weakness of the rupee is telling us is that the CAD remains very high and India unfortunately still does require a lot of inflows. I do think the CAD is going to improve more than people’s expectation. Not necessarily because of gold but as exports are going to surprise a lot of people by their strength. Not because we are expecting some sort of v-shaped global recovery, but I just think that weakness of the rupee will help to boost exports.
Nevertheless, even with an improving current account position it is still a huge deficit to finance. It still requires a lot of good fundamental news. We will have short periods of currency strength but unfortunately we will probably have longer or significant periods of currency weakness. In 12 months time or by the end of the current financial year the rupee will be softer than it is now, perhaps in the order of 56.5-57.
Q: You did mention that S&P was quite concerned about the growth parameters in India. We have a Q4 GDP data which is coming out on the 31st of May. What would your estimate be for that one hence what would you possibly extrapolate it to be for FY13 and what is your target for FY14? Do you see a formidable pick up at all?
A: For the March quarter, the final quarter of the last fiscal year it is hard to be particularly optimistic. In particular the government side will be a sizeable drag on activity as it was in the previous quarter that is December quarter. So, I think we will do well to see a modest pick up in the Year-on-Year growth rate. That is the most we can expect. I suspect it is going to remain sub-5 percent Year-on-Year in that March quarter.
Thereafter I am more hopeful and I am very much at the top end of the consensus range as far as growth in 2013-14 is concerned. Around 6.5 percent is the number we have. It may sound a lot. It is not a particularly strong recovery by Indian standards and the one quick point I make in that context is that I suspect capital spending is already improving.
We have seen some better capex numbers in the industrial production statistics and in the national accounts themselves. Lower interest rates, lower oil prices, stronger exports, all bode well for a recovery in the economy and perhaps capex in particular. That is the one area I would pick up as the most likely to surprise on the upside.