Re to stay under pressure throughout 2011: AV Rajwade

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Q: For this quarter, what is the call? The big bridge between the inflows and outflows between exports and imports has been the portfolio flows. That seems to be receding though not in serious hurry but we are not really seeing so much of a pressure on the dollar-rupee?

A: I agree with you that in the last few days, after it crossed the 46 level, since then it has been fairly stable in the 45.60 kind of region but that has been only for a few days. I don’t think the basic demand-supply imbalance has changed dramatically during these days. It's very difficult to say what exactly will happen on a specific day or in that specific week what would be the factors.

Q: What would be your broader trends first for the quarter?

A: My expectation is still that the rupee would continue to remain under pressure through out 2011.

Q: There are two factors which appear to be helping the rupee as well. One of course is that the December trade data was a remarkable contraction in deficit. Where were we at USD 13 billion and we came down all the way to USD 2.5 billion? Plus, going by the kind of food inflation numbers we are seeing, we should be expecting the RBI to continue to puts its foot on raising interest rates; in which case, the premium to stay in dollars just becomes that much more?

A: I wouldn’t quite agree with you there. Yes, I agree that the RBI may put up the interest rates but in our case, the forward margin is not so much a factor of interest differentials except at the very short end. Cash-Tom and Cash-Spot - those kinds of swaps, the margin is governed very much by interest differentials but longer-term margins are much more a result of expectations rather than anything else.

I would not expect that there is a direct relationship between the short-term rates which the RBI engineers and the one-three-six month forward margins. So, it’s more a question of expectations rather than the forward margins.

Also, I do not think that a hike in interest rates would attract more funds in the debt market. There is a limit to what can come in the debt market and most of the funding really comes in the equity market. A higher interest rate would be a bearish factor for the equity market. Overall, the downward pressure on the rupee is likely to persist.

Q: You are looking at 46 before the quarter is out?

A: Possibly, yes.

Q: Anything for the second calendar quarter?

A: A lot would depend on what's happening in the Middle East. The oil price has come pretty close to USD 100 per barrel. It had crossed intraday, then got back a little. It’s pretty close to USD 100 per barrel. Now, we also have the problems with Iran like the payment problems etc. The sanctions on Iran seem to be biting.

The question then is that the problems in Egypt for example, will they escalate to the oil producing countries? Libya, Kuwait and what kind of impact they are going to have on the oil price. There are lots of questions in terms of oil price because of the political situation.

All other commodities are going up. Copper is pretty close to USD 10,000 and people are already talking of USD 11,000. The global demand has gone up with economic recovery. Our import bill is more likely to grow because of these commodity price issues. The most important commodity we import is oil and that depends on the situation in the Middle East.