Rupee oversold; solvency fears unfounded: Credit Suisse

Moneycontrol Bureau

Brokerage house Credit Suisse is of the view that the recent pressure on the rupee has more to do with a liquidity problem, and is not a solvency crisis.

"While external debt has risen, as a percentage of reserves and of GDP, it is much lower than in the 1990s; this reduces much of the solvency risk. However, with debt to be rolled over in the next year, now two-thirds of currency reserves, any sustained disruption/reversal in capital flows can cause sharp currency swings, like the FII debt outflows did over the past month," said the Credit Suisse note to clients.

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Also, the brokerage feels the rupee is cheap and does not agree with the widely-held view that it should weaken further against the dollar, since inflation is high. It blames the heavy sale of Indian debt by foreign funds as the main reason for the recent slide in the rupee, which plunged to a record low of 60.76 to the dollar last month.

"Any disruption in Emerging Market equity flows can hurt the rupee. But this is likely priced in—rupee is the weakest currency over most time periods, and the 36-country REER (Real effective exchange rate) is not far from its two-decade low," said the Credit Suisse note.

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