See rupee in 54-56 range over next 3 months: Barclays Cap

According to him, the rupee will not rally significantly from hereon. "We look for dollar rupee to be within 54-56 range over the next three months," he asserts.

Also read: See rupee in 54-56 range in near-term, says Citi

Below is the edited transcript of his interview with CNBC-TV18's Latha Venkatesh and Ekta Batra. Also watch the accompanying videos.

Q: With the lowering of rates in China and Europe, how would you look to play Asian currencies? Do you think Asian currencies are now building up for greater weakness? What’s the general comment on emerging market currencies?

A: I think, for now, Asian currencies don’t have too much scope to appreciate. The global backdrop is weakening. If you look at the PMI and ISM numbers that we have had over the past week, they do suggest that we are seeing some kind of a synchronised global slowdown here.

One of the beacons of hope in the global economy was the US, but it is indeed slowing as well and Asia with its large export base. I think central banks really don’t have the incentive to let their currencies appreciate materially in the near-term, until some of these external risks start to dissipate. So, we are not calling for any significant appreciation in Asian currencies in the near-term.

Q: We saw quite a sharp deprecation in the euro post the ECB action. If there is further weakness in the euro, what would you possibly statergise in terms of the rupee weakness?

A: I think the key thing to examine with respect to euro weakness is whether or not that weakness is contained. In the past, other high beta counters such as the rupee, South African rand have moved very closely with the euro, acted like a risk currency. But we have seen euro move lower over the past week. Euro-Aussie also is a case of point.

I think the question that investors would be asking is, ‘whether the rise in Spanish yields that we have seen in recent days is consistent with lower euro?’ I would argue that there is disconnect. So, if Spanish yields continue to rise, if the euro continues to weaken, I struggle to think how the likes of the rupee will be immune from such weakness.

Q: The commodity indices and individual commodities like crude and copper fell rather sharply, when the euro was still holding above 1.24 in the previous week’s weakness. Now, we see the euro going all the way to 1.23. The dollar index has strengthened and yet we find some fairly strong commodity prices at this point in time, especially in crude. I know commodity is not the area you look at, but that has its impact on Indian currencies as well. Up until a week ago, there was sell Indonesia, buy India kind of trade because of the fall in commodity prices. Has that trade completely played out or should we still look for commodity weakness and therefore perhaps a buy India, sell commodity currencies trade?

A: Further up we are pretty positive on commodities, particularly as we move through the second half of the year. But I would say, in the near-term, with the global economy slowing, I think the risks to commodity prices are to downside. In that environment, commodity, currencies will suffer.

For the rupee, you have to balance out the benefits of lower commodity prices versus the fact that global demand is weaker. I would argue that the global demand aspect and the fact that risk aversion may increase will outweigh the benefits of lower commodity prices in the near-term.

I think if commodity prices were falling on the back of a huge increase in commodity supply then maybe net-net that will be more positive for the rupee. Looking weaker global demand which is driving lower commodity prices then I think it will actually suffer. So, we think the rupee will not rally significantly from hereon. We look for dollar rupee to be within 54-56 range over the next three months.