Rupee may settle down in near term: Westpac

Excerpts from Markets Midday on CNBC-TV18 Watch the full show » Nifty BSE | NSE 25/05/12 Are Mutual Funds betting on Nifty?

Rupee has hit a 9-year high and Sean Callow, Senior Currency Strategist, at Westpac Banking says investors see a lot of upside potential in Asia. Over 12 months, he sees a trend of about 41-mark, so the rupee may settle down in the near-term.

Excerpts from CNBC-TV18's exclusive interview with Sean Callow:

Q: What would you attribute the rupee's rise to? There has also been a global falling of the dollar versus most major currencies. Would that explain at least part of the fall or is it largely a domestic factor?

A: Certainly, it does explain part of it. I think in context, we have a weak dollar particularly against the Asian currencies and a lot of investors see a lot of upside potential in Asia, clearly, rallying equity markets over the past few weeks.

The recovery from the risk aversion, sell off in mid-February to early March, that's certainly positive as well but it also does distinguish India by interest rates that are high by global standards. In fact, they are set apart from China and lot of parts of Asia where yields are actually very low.

Q: Would you say that the only factor that can reverse this direction of the rupee would be the Central Bank, and if indeed the Central Bank were seen anytime soon, what kind of a downside do you see for the rupee?

A: I think there are probably two potential factors that will turn it around. One, as you said, will be Central Bank intervention. The Foregin Exchange reserves have risen 23 billion so far this year, so there is certainly help in substantial action already. The other is, of course, return to the more unsettled low-toll equity markets and risk aversion, as I said, we saw few weeks ago that certainly hurt the rupee.

I think the speed of the decline in dollar versus rupee would really draw the attention of the Central Bank, so at this point, we haven't changed our baseline forecast for the rupee. We have it just under 43 to the dollar by the end of June. We will be keeping an eye on the price section but at this stage, we think it will probably stabilize in coming weeks.

Q: You said under-43 by the end of June. What is your 12 months horizon on the rupee, because as we understand it right now, the Central Bank may not act in its own on April 24, when it meets. And there maybe an entreprenual policy stance that they come out with. With that bearing, what may happen with interest rates and otherwise what would be your 12 months horizon on the rupee?

A: Over 12 months, we have a trend of about 41-mark, so we do see it settling down in the near-term. We think the trend to a weak dollar, around the world, is intact and our baseline case is that the RBI does tighten next week.

So, at least on the yield front, we see them trying to take an affection to cool the economy. But inflation is still very much in their target at this stage, so right above 41over 12 months.

Q: Do you see any longer-term ramifications of this strength of the rupee at all? Do you expect it to last this kind of strength of the rupee, which is little out of sync with its REER Index. Second, if it indeed stays, what kind of ramifications on the wider economy do you think current account deficit could widen and that could scare away some capital flows?

A: From a longer-term point of view, on our numbers, we don't see it as being exceptionally overvalued. I do have some reservations about the fair value modeling on currencies in general, I am not sure we can reallly trade off them profitably.

I think in the bigger picture, if India is going to achieve the sort of growth rates it's seeking, and increase its role in the world and share of a global FDI and so, and if it's to achieve that, then it will come along side an appreciating currency.

So one should not see it as a turn-around. But as you said, on the current account side, I think probably you do have a current account deficit for sometime. That's not necessarily a cause for great concern for a currency, as we see in the case of Australian and New Zealand dollars, which have been running current account deficit of 5-9% of GDP for some years. So, if your economy is strong, if your deficit is because of a strong economy then it's not necessarily a problem for the currency.