Agam Gupta, managing director, head of FXRC, South Asia, Standard Chartered Bank foresees the rupee sliding to the levels of 52.50-53 per USD in the next few weeks.
"Any dips to 51.80 should be bought, so in the short term there is a risk of us going to 52.50 or even 53 over the next couple of weeks. This will get exaggerated especially if you see a bit of risk off on the global markets," he said in an interview to CNBC-TV18.
Given the widening current account deficit, soaring crude oil prices and high demand for oil, he sees a possibility of rupee jumping higher than 53 per USD levels.
“If and when rupee touches 53.5 54 per USD levels, the Reserve Bank of India (RBI) might intervene to stop the rupee’s movement, he added. Meanwhile, the rupee recovered from early lows today helped by dollar sales from some foreign banks, but Gupta doesn’t see rupee heading back below 50 per USD levels anytime soon.
Below is the edited transcript of Gupta's interview with CNBC-TV18. Also watch the accompanying video.
Q: What is your own sense of the near term moves of the rupee say for the month of April and maybe early May, do you think it remains ranged or we could see some bad news for the rupee fairly quickly?
A: Basically, it looks from the price action that any dips on the USD INR are getting bought and a short term support at 51.80/USD is in place. Any dips to 51.80 should be bought, so in the short term there is a risk of us going to 52.50/USD or even 53/USD over the next couple of weeks. This will get exaggerated especially if you see a bit of risk off on the global markets.
We are in a situation right now where any sort of stability or risk on mood in the global markets at best in the rupee just translates to stability, but not to a down move on dollar-rupee. That kind of makes me feel that there is a risk of 52.50/USD, 52.75-53/USD getting tested in the short end.
Q: If you look at historical data or in the past week itself the rupee depreciated a 1.5% as compared to other currencies. According to you, which currency do you think we are tracking the most? Do you expect us to possibly touch those levels of around 54 that we had seen late last year?
A: If you look at the way market participants look at rupee relative to other currencies, it’s against either the 36 country ReR, so it won’t be fair to say there is any specific currency that the rupee tracks. But if you look at what the RBI tracks, it’s the 36 country ReR and the 6 country ReR, so we will continue to be tracked against a basket of currencies.
If you are looking at immediate market reaction to any currency move it broadly tracks dollar Asia and the G-10 differently on different days. At the moment rupee seems to be doing its own thing, but in the medium term it will track the 36 country and the 6 country ReR.
Q: You spoke of 53 maybe in the near term itself. What is your sense of the slightly longer term? At the moment there is no question of if it will touch 54, but when it will break that near term high?
A: Yes, the market is looking at higher levels because of the fact that we have a stubborn trade deficit and that refuses to go away right now. Also, oil prices remain high and India's oil demand remains pretty high, it doesn’t get impacted by the high crude price.
There is a view in the market that we go higher than 53 also eventually. Any levels of 54-54.50 are possible and they would elicit sharp kind of reaction from the RBI. That is the level where the RBI might do something to stop the move.
Q: What basically do you tell exporters and importers, are you asking exporters to hold off because 54 looks inevitable?
A: It’s a question of what's your view on the speed of the move is because the forward premium is close to Rs 3 for one year, so even today if you sell for one year you do get 55. As always, part hedging of the longer term exports is a good idea. In the short term its better for importers to hedge because at the moment there seems to be some pressure in the short end on towards the right hand side.
Q: You don’t really see the rupee heading back below 50/ USD anytime soon?
A: I don’t see the rupee heading back below 50/USD anytime soon. At best if you get some good risk on sentiment and it translates into some short term flows, you could see 51/USD, but I don’t think below 51/USD at the moment.
Q: What is the broad year end forecast for the rupee? Does it get even to 55/USD and worse?
A: No, we are not looking at levels of higher than 54/USD right now. At the moment our official projections are still at 49.50/USD for December, which we might overshoot but levels of 55/USD are not on the horizon at all.
Q: 49.50/USD on what premises given this kind of a trade deficit?
A: The assumptions are on the capital side, so it has to be seen whether projections on the capital inflows are going to play out or not. Obviously, the trade deficit has been surprising more on the higher side and the capital inflows have been surprising on the lower side, so if that trend continues we will have to see what do we do.
Q: What is the broad range on the markets? We did see an 8.3% but thereafter ofcourse the 10 year has been consistently given up. What would be the range and would you only watch 10 year, give us other ranges, I guess 10 year we have only one more tranche left?
A: The 10 year will be soon off the run so we will have to look at the new 10 year when it comes, but broadly I see the 10 year ranging between 8.35% and 8.70%. Any moves above 8.55-8.60% towards 8.75% will attract buying from the RBI and it will be basically to inject liquidity as they maintain, but it will also be with an eye on stability in the markets. Levels if 8.35-8.40% is difficult to sustain because of the big supply that is lined up, so 8.35-8.70% should be the 10 year range.
Q: Could you just throw us some light on the current liquidity deficit?
A: The current liquidity deficit is around Rs 90,000 crore and it has spiked up because a lot of currency leakage in the first two weeks of April of around Rs 30,000-35,000 crore. The liquidity deficit is definitely higher than what the comfort level of the RBI is which as always has been the stated 1% NDTL.
We do expect some of it to come back and historically after May there is some currency coming back into the system. But at the moment its remaining higher than the RBIs comfort level and will continue like that for most of May.