SENSEX NIFTY
Aug 06, 2013, 01.25 PM IST | Source: CNBC-TV18

Rupee may overshoot targets; RBI in catch-22: Credit Suisse

The Indian rupee on Tuesday hit a record low of 61.59 against the US dollar. According to Ray Farris of Credit Suisse, the rupee is likely to touch 61.50/USD in 3 months and 62/USD in 12 months. But after today’s drop, he sees risk of an overshoot of those numbers in the short-term.

Ray Farris

Director, Credit Suisse

More about the Expert...

The Indian rupee on Tuesday hit a record low of 61.59 against the US dollar . According to Ray Farris of Credit Suisse, the rupee is likely to touch 61.50/USD in 3 months and 62/USD in 12 months. But after today’s drop, he sees risk of an overshoot of those numbers in the short-term.

He feels the RBI has gotten itself into a position where it is stuck between a rock and a hard place. “If it does not stabilise the currency the likelihood is that the currency will have a negative impact on inflation, which will be bad for equities and will mandate further hikes in interest rates and the longer it waits, the more it probably has to do which makes the outlook for equities even worse,” he told CNBC-TV18.

Below is the verbatim transcript of his interview to CNBC-TV18

Q: We have seen dollar strength across some emerging market (EM) currencies, but the rupee has been singled out for severe punishment today. Are you seeing more downsides? What is going so damn wrong?

A: India has got a large Current Account Deficit (CAD) and it needs capital inflows to finance that deficit. The Reserve Bank of India (RBI) correctly raised interest rates and began to move real yields. Their approach has been positive, but then they called in a question how long they keep interest rates tight.

There is a lot of uncertainty in the market about the policy regime right now. So dollar-INR probably is going to continue to rise. We had forecast for sometime of 61.50 in 3 months and 62 in 12. Right now the risk is of an overshoot of those numbers in the short-term easily to 61.50 and probably above.

Q: As a market man what would you expect from RBI? Would you expect that they will now go ahead and hike the repo rate rather than just rates in the penumbra?

A: The specific inter-events are not what are important. Important thing is really the message and the credibility delivered into the market. They need to make clear that there is a level in the rupee that they are not willing to tolerate.

They build credibility by hiking rates further and sending the signal telling the market we will maintain this higher level of rates or increase rates further regardless of growth until the currency is stable and inflation has fallen meaningfully. In the meantime, some of your speakers have noted that structural reforms are also important and that is absolutely right.

The Ministry of Finance can help tremendously by announcing the realisations of the retail market assisting in liberalisations in some of the energy markets and making it easier for foreigners to buy onshore assets.

Q: You referred to the uncertainty with respect to tightness in the money markets. RBI in the policy used the word calibrated rollback. What is your opinion? How long will the measures that they had undertaken a few weeks back in the system? Will it be for the next two-three quarters? What is your sense about the longevity of these? Secondly, are rate cuts ruled out completely for FY13?

A: These are very good questions. They are questions that the RBI has itself created in the market. Our concern is by coming out, hiking rates and saying as soon as we possibly can we are going to roll this back.

We do not know what the real objective is. Is it to stabilise the currency for a week or two, is it to stabilise the currency on a more sustainable basis or on a more prolonged basis. So, there is a tremendous amount of uncertainty about how long rates will remain at these levels, whether they will rise further particularly going into a year to next year that is going to be dominated by politics.

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READ MORE ON  dollar, CAD, RBI, rupee, Credit Suisse, Ray Farris

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