Speaking to CNBC-TV18, Sunil Kalra, Head of Trading - Fixed Income and Currencies, Citibank India said that their official forecast for the dollar-rupee is 39 for March-end and 37 for year ending ’09. “If the global situation remains friendly and the India story continues, capital flows continue as strongly as they have been in the recent past, I think it’s a matter of time before we break on the downside,” Kalra said.

Excerpts of CNBC-TV18’s exclusive interview with Sunil Kalra:

Q: What would you take be on the dollar? It seems to be rock steady at this point in time, but would you say 39.25 could get broken in this quarter?

A: Historically the RBI has always said, and they’ve practiced it as well, that no levels are sacrosanct, so their stated aim is curb volatility and not to hold any particular level. Time and again, they have said that they have no target level in mind and we have seen that over the last few years. So they probably are intervening very strongly at this point because the flows are very strong.

But I think it’s a safe assumption that if capital flows do stay strong during the rest of the year, it’s a question of time before levels give way, whether on the downside, or if things turn bad, on the upside. So it’s just a level where the Central Bank seems to be buying dollars at this point of time and nothing more than that.

If the global situation remains friendly and the India story continues, capital flows continue as strongly as they have been in the recent past, I think it’s a matter of time before we break on the downside.

Q: How are you expecting the dollar to perform globally? In this quarter are you expecting 108 for the yen and 1.10 for the Swiss Franc, will all get broken?

A: In the recent past, dollar trends have also been segregated into dollar trends against emerging markets, dollar trends against G-7 currencies, how the dollar behaves against carry currencies. So how the dollar behaves, going forward, will be a function of how the US situation pans out. For eg, if US is able to avoid recession, we probably will see the dollar selling off less against the majors, but emerging markets will continue to be strong against the dollar simply because the negative effects of a US slowdown might not spillover into emerging markets.

At this point of time, the first week of the trading year has not really thrown up clear trends with the dollar yo-yoing between bouts of strength and weakness. Going forward, if the US does manage to avoid a recession, which is still the base case for lot of banks, then emerging markets will still stay strong and hence, their currency should do well against US dollar this year as well.

Q: You touched on the kind of flows we may see, we saw USD 17 billion last time and there is lot of talk about excess petro-dollars in sovereign funds being set up to come into India. If all that money does find its way into India, what is your assessment of where the dollar-rupee could be at the end of H1’ 08 and consequently for the year-end?

A: Our official forecast is 39 for March-end and 37 for year ending ’09. However, we don’t expect the dollar to weaken as much as it did in 2007 simply because, in terms of absolute levels, the dollar is much lower than what we saw in 2006-07 move. Secondly, at some point in time, the sensitivity of exporters to further appreciation in the rupee will be far more than what we have seen so far. I think we will see a scenario where, if capital flows stay strong, we will see the rupee appreciation which will be steady, but will continue to see Central Bank on the bid stopping and slowing the pace of appreciation.