May 03, 2012, 02.49 PM | Source: CNBC-TV18
For the near term, Olivier Desbarres of Barclays Capital believes the dollar-rupee will move higher to retest its earlier highs.
Olivier Desbarres (more)
Former Head of FX Strategy, | Capital Expertise: Currencies
In an interview to CNBC-TV18, Desbarres says that the problems of twin deficit and high inflation is what puts India aside from it Asian peers, leading to underperformance of the rupee. “Ultimately, dollar-rupee may actually come back down again if we are correct in believing that Chinese and US growth will be robust in the second half of the year and some of the tail risks concerning the eurozone will fade,” he added.
While most people are concentrating on the levels the currency is scaling with ease, Desbarres says the speed at which the rupee depreciates is what is more important for policy makers. “If the weakening in the currency is very gradual, central banks will feel more comfortable, particularly if it reflects a current account deficit which is the case for India,” he said.
As of now, Desbarres says he isn’t too bearish on the rupee compared to the view on the street.
Below is an edited transcript of his interview with Reema Tendulkar and Mitali Mukherjee. Also watch the accompanying video.
Q: Where do you reckon the rupee will go from here on and is it likely that we will breach our record low of 54.29 very soon?
A: I don’t think it takes a huge leap of imagination to visit a scenario where dollar-rupee does revisit the levels that you mentioned. In my opinion, the willingness and the ability of the government and the central bank to step in with measures to support the rupee matter in this occasion. There has been talk of potential central bank intervention to support the currency, and if course RBI has shown in the past its willingness to do so, but again the question in mind would be does the RBI think it’s appropriate to use FX reserves to support the currency in this context.
I think the answer to that partly bores down to if we think this currency weakness is justified by the global environment and fundamentals. After all, the rupee is a high beta currency that tends to underperform in global risk appetite is soft or lukewarm, which I think currently is the case. There has also been a number of India specific events which I think have contributed to the weakening of the rupee versus its emerging market peers. So I don’t think there is a clear cut answer for the RBI and government as to whether they should replicate what they did late last year and introduce measures to support the currency. But I think there are still a number of policy tools open to policy makers at this stage.
The final point I would make is I think there is a lot of focus on the levels, but I think for policy makers, particularly central bank, what matters is the speed at which the currency moves. If the weakening in the currency is very gradual, central banks will feel more comfortable, particularly if it reflects a current account deficit which is the case for India. I think what the important matter is that this move has been very rapid and has gone against the grain of modest appreciation of other currencies. So I think we will see further dollar-rupee upside, but I am perhaps not quite as bearish as the local and international community at this point. I think there will be opportunities to re-enter long rupee trades given that it does benefit from good carry.
Q: How important do you think are these individual issues like taxation causing pressure for the rupee and would you say it looks more likely that by the end of this year the rupee will be far weaker than where we are standing at right now?
A: I think these issues do matter, they always will. The country is great to look at themes and global risk appetite, but ultimately country specific factors and variables will have an impact on these markets. When the global backdrop is one of uncertainty, when Chinese, US, European growth still have tail risks attached to them, global risk appetite I think is only lukewarm and we can see that in equity outflows not just from India but from other large emerging markets.
So in this current environment, I think investors are particularly sensitive to domestic policy and can react quite negatively to perceived U-turns in policy. I think the government perhaps in that sense has introduced these measures or talked about these measures at a time when the market was going to be very sensitive to them. I think really this would require from the governments’ perspective a great degree of explanation to effectively educate the investors as to why these measures are being introduced and how they will impact these investment horizons.
Of course India has other country specific issues which set it apart from the rest of Asia, namely twin deficits and still high inflation rates which I think is the crux of the structural problems there. So again I think levels perhaps matter a little bit more to investors and to the policy makers, I think the speed at which it would actually matters most.
Again, I think the path of least resistance near term is for dollar-rupee to push higher, perhaps revisit the 54 highs. I think that by the end of the year, ultimately dollar-rupee may actually come back down again if we are correct in believing that Chinese and US growth will be robust in the second half of the year and some of the tail risks concerning the eurozone will fade. There are some key global factors which are going to have an impact on the rupee and so we have to make a number of bold assumptions when we look 6-12 months out.
Q: The dollar index has basically been hugging the 79 mark, made a couple of attempts towards 80. What’s your sense of what that may do this year?
A: Indeed the dollar index hasn’t done very much in recent months and you could actually make the same point for a number of G10 and EM crosses as well as some major equity market which have been effectively range trading in recent weeks with ultimately little direction. I think that’s partly reflection of investors’ lack of conviction as to what is going to happen on a global scale relating to growth.
Our 6-12 months view is ultimately that US growth will consolidate and that US yields will be allowed to grind higher. This will provide support for the US dollar particularly against the euro but also against the yen and the Swiss franc. So ultimately, we think that DXY index will push higher. But I think it’s going to be quite a slow process, this won’t be linear, there will be pull backs.
Ultimately Mr. Bernanke, the Fed chairman, and his vice-chairperson Mrs. Yellen, are trying to anchor the short end of the US rates curve and I think that’s going to slow the up rise in US yields and ultimately try and hold back the US dollar for a period of time. The reason is simple - Mr. Bernanke doesn’t want to tighten policy too fast too soon because that could derail US growth.
Q: Europe is not out of the woods, but despite that the euro has been fairly resilient. What’s the trend that you see for the euro?
A: I would argue that euro-dollar has actually been quite a boring cross. Despite the backdrop that you allude to, we have had negative news out of Spain in terms of ratings and disappointing growth. There is also a great degree of uncertainty politically with elections in Greece and in France over the weekend which may not have a huge near term impact but maybe ultimately very relevant in the medium term.
It is interesting that the euro has been able to deal with all of these issues and I think that’s partly reflection of the fact that policy makers in Europe have dealt with at least one of the two major problems in Europe. They have been able to deal with the liquidity problem by injecting liquidity through the LTRO, but what I think the eurozone hasn’t really fully dealt with is the solvency issue. That ultimately means dealing with low growth and a far more complex issue in my opinion.
For the moment, I think the markets are willing to give European policy makers the benefit of doubt because they have dealt with some of the symptoms that have hurt the eurozone in the past six months. European policy makers have shown their ability to deal with contagion to ring fence some of these problems, but I think ultimately the underlying problem is very weak growth and that’s going to keep policy very loose from the ECB’s perspective. That’s ultimately going to mean that yield spreads start working against the euro as the Europe progresses. So we still see euro-dollar going down to 1.125 and then 1.120 over 6-12 months respectively.
Q: You said the rupee might fall to 54 in the near term but will find some strength towards the end of the year. That pull back in the rupee, is it based on the global sentiment improving or do you expect the RBI to intervene and provide some support to the rupee?
A: I think ultimately it could be a combination of the two. If the RBI and the government shows willingness to at least slow the pace of weakness in the rupee, and those measures take place at a time when global risk sentiment is a little bit stronger, then the two factors together could ultimately mean that we see renewed interest in long rupee positions.
Ultimately, the rupee does benefit from attractive carry in a world where few currencies do offer carry, given that policy is ultimately very dovish in both the G10 and in many emerging markets.
So I think the combination of some measures from the authorities, better risk sentiment combined with carry could be an environment where we do ultimately see long rupee positions being put on. But again, it may not be selling in the next few days or even in the next one week; it might be a phenomenon that kind of plays out over the next coming quarters.