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Re to see 43-43.5/$ levels in next 2-3 months: Experts

Published on Thu, May 15, 2008 at 11:24 | Source : CNBC-TV18

Updated at Tue, May 20, 2008 at 16:25

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Claudio Piron , Head of Asia FX Strategy, JP Morgan estimates that in the next month or two, we can see the Dollar-INR go up to Rs 43.50/USD. He estimates that as one goes by the end of the year, one will see some appreciation resume.

Jamal Mecklai , CEO, Mecklai Financial sees a a soft rupee ahead. "I don't see it falling perhaps not even to 43.50/USD but maybe it will touch 43/USD at some point," he said.

Excerpts from CNBC-TV18's exclusive interview with Claudio Piron and Jamal Mecklai:

Q: The targets you are working with on the rupee and whether you feel this indeed is going to be a year of weakness for the currency?

Piron: We would characterize it as a moment of momentary weakness. We do think in the next month or two, we can see the Dollar-INR go up to Rs 43.50/USD; our best estimate as to where we go by the end of the year is that we will see some appreciation resume. The moving part in all of this is the oil price and as you mentioned, the oil bill which we estimate - every USD 10 increase in the barrel of oil for India translates to about a USD 6 to USD 7 worth of an increase in their oil trade deficits.,So that has been one of the overwhelming factors as well as the general dollar strength that we are seeing throughout the Asia region.

Q: Marry that with the domestic situation because yesterday some of the traders were talking about the fact that trading positions were getting unwound, do you expect to see in the near term, more weakness for the rupee?

Mecklai: The rupee will remain soft and perhaps even long than a month or two than whoever it was who spoke before me. It's basically that the global markets are still not investing anywhere; so India is still fundamentally strong. But I don't think you are going to see the kind of inflows you have seen before and partly also the strength of the dollar overseas. So I would see a soft rupee and I don't see it falling perhaps not even to 43.50/USD but maybe it will touch 43/USD at some point. It is going to stay weak for around next six months and then turn around again and head back North of 40/USD, where it belongs. But I think that would be next year.

Q: What is it that is muscling up this strength in the dollar right now, is it the expectations that the Fed might actually halt in terms of their moves or start moving in the opposite direction or is it primarily like you indicated what's been happening with crude prices?

Piron: We have two hypotheses. Generally the market is at some stage of confusion. The first hypothesis is that the delivery is more benign and we have unwinding of positions; we have some of the negative terms of trade shock through higher oil prices, which is naturally a negative for Asia. In that respect, we have seen Asian currencies weaken whereas some of the Latin American, European and African currencies have done relatively better in this context and if you have looked at the dollar with the major crosses, it has done pretty much nothing.

The second hypotheses is potentially Asia is behind the curve and we have a more inflationary impulse; the Central Banks in Asia are sitting on their laurels and taking things too easy with a prospect of higher inflation, particularly if the Fed cut cycle is over and now the focus resumes on terms of inflation. If by some surprise, we were to get the Fed tightening by the end of the year; I don't necessarily subscribe to the second hypothesis - I would still fall in the former category, that this is just the near-term of trade shock that we are witnessing. But it does help in the background to keep that second scenario - whether we see a more sustained inflationary impulse come through which may adverse Asian currencies and the Indian rupee for a more sustained period of time.

Q: Comment on the fact that inflation across economies is high and we are also dealing with that problem - would you expect the RBI to in terms of Managing the Currency as well as higher inflation?

Mecklai: Claudio is right. It is the inflation issue, and it is the more serious problem than people think it is. However, I am optimistic that it is not going to get out of hand. But that's what is going to keep the market off balance. I don't think there is a whole lot of what RBI can do, raising rate is not monetary phenomenon. So that's not what they can do very much; there was a lot of talk some time ago that maybe they should strengthen the rupee to contain inflation. I don't think that works here and I don't think they are going to do that. So we just have to ride it out and it's going to be sort of edgy times and people who got accustomed to a strong rupee got surprised. But that's the market and the market is supposed to surprise you from time to time and the real lesson that people have is they have to learn how not to focus on the price and really to focus on the managing risks.

Q: One related question - there was a lot of furore almost a couple of weeks back on what happens with the MTM losses for a lot of those companies; do you think a lot of those equations need to be reworked because of the way currencies have been moving and not just us, its also the actively traded Yen?

Mecklai: On one hand with the dollar strengthening most of he losses have been reduced, which is a good thing and everybody is breathing a little bit easier. However the other issue is that the Accounting Standards Board asked people to start reporting these and while still not mandatory according to law, that is creating a lot of action.So a lot of companies are now because they being compelled to report them are starting to fight with banks, file more suits etc. I think its going to take 6-8 months.

Another thing is the learning experience although expensive because people lost lot of money, but there needs to be some sort of way of settling them; there is blame on both sides. I am not sure that the rupee is implicated into many of these because most of them are cross currency plays/players.

Q: What do you expect in way of policy action from our own Central Bank here?

Piron: The JP Morgan's view is that the preference of the RBI is still to lean more on the Cash Reserve Requirement hikes rather than any repo direct interest rate hike to the market, so to a certain extent the banking sector would take more of the stress.

It makes sense with respect to inflation being more of a supply side phenomena and that at best, we may have to ride some of this through - part of it will be ameliorated with fiscal subsidies and part of it may be by restraining some of the credit growth through the banking sector; that seems to be the best approach at this moment in time.

Foreign Exchange appreciation is harder for India, given the current account deficit situation and again if we have negative in terms of trade shock, it may not be the correct policy risk response to what is the supply side issue.