Rupee won‘t breach 60/$ for now; CAD still a worry: Experts

The slew of measures recently announced by the Reserve Bank of India (RBI) to curb rupee volatility have aided the Indian currency and it is unlikely to fall beyond 60/USD now, says Ananth Narayan of Standard Chartered Bank . He sees the rupee hovering between 57.50-60/USD in the short-term. However, concerns on FII outflows and high current account deficit (CAD) remain.

Arun Kaul, Chairman of UCO Bank also agrees that RBI’s measures have helped and do not indicate that it the central bank has initiated the process of monetary tightness . “The measures were successful and had the desired result. These are all short-term measures which will reverse the moment the volatility on the currency goes away," he added. Below is the verbatim transcript of their interview on CNBC-TV18 Q: Do you think Reserve Bank of India (RBI) has been able to convince exporters to come and sell? Narayan: Absolutely. The intent of the RBI is amply clear. In many ways the RBI has indicated that it is there, it has thrown its hat in the ring. So, clearly there is some kind of a cap, which has been placed by the market on dollar-rupee. It is difficult to see the rupee going beyond 60/USD at this point of time. So to that extent, yes, we are seeing exporters coming and taking advantage of the spike up in forward premia as well to try and lock in some of the export contracts that they have. At the moment it is looking reasonably good for the rupee. We are ignoring what is happening globally. This is clearly led by the events of the domestic market over the last eight days or so and it does look like rupee will remain capped at Rs 60/USD and probably in a 57.50-60/USD range. Q: In the last 30 hours that is yesterday and the couple of hours of trading today, did RBI impact markets through intervention or is it only their policy steps that they have taken? Also in your conversation with exporters, have you advised them or are they giving you the impression that it is better to sell near-term forward dollars for whatever they are getting? Narayan: Very difficult to say on the RBI intervention part but I suspect they didn’t mean to intervene too much in the last couple of days. The reality is that the line in the sand has been drawn and it does look like dollar/rupee upmove is capped for now. So to that extent we have seen exporters walking in and taking advantage. More than us or anybody else advising them, it is a strong signal which has gone to exporters and to anybody having dollars that at this point of time, it is probably a good time to bring in dollars and convert that into rupees. Q: You spoke about a range, from 57.50/USD to 60/USD do you see 57.50/USD quite likely in the near-term and what is your expectation from the Tuesday policy? Narayan: Reality is that the range we are talking about is for the short-term. We also know that there are other concerns in the longer-term to be addressed. The fact is we still have a second month of foreign institutional investments (FIIs) outflows both on equities as well as on debt. Fact is that the core issue is not of the sentiment; it is also of the current account deficit (CAD), which needs to be addressed. There is progress happening on that score. Things are genuinely improving and there are more things that the authorities can do to improve the current account going forward. There are risks; if growth does slow down and if this bout of tightening which has happened right now as a medicine to the foreign exchange problem if that impacts growth going forward, clearly we have other issues in terms of equity inflows, in terms of equity sentiment, in terms of FII outflows with the elections round the corner. So, at the moment given that there is a kind of a sentiment change in terms of a cap in dollar/rupee, there is a possibility that dollar/rupee comes down to 58/USD or maybe even 57.50/USD. However, the reality is the medium-term and the longer-term view depends upon sorting out those core issues in the run upto the elections. Q: Coming now to the way the money market liquidity will pan out from hereon, in the first place what are you expecting to hear from the RBI on July 30, will there be any action or do you expect only talk? Kaul: Whatever measures RBI has taken yesterday and earlier, they are all aimed at containing volatility in the rupee. I must say they have very successfully done because we are seeing rupee coming below 59/USD level right now. Such measures in the past have been done – they were only temporary measures for the short-term only. It does not indicate that RBI has initiated the process of monetary tightness. These are all short-term measures which will reverse the moment the volatility on the currency goes away. My view is probably these measures will not stay for long time; they are absolutely short-term. Currently, it is not a busy season for credit. So with regards to that, my view is that long-term interest rates will not spike substantially; we are seeing some spike for the short-term. All these measures are going to be short-term measures. On July, 30, I don’t see RBI doing anything since these measures had the desired result, desired effect. _PAGEBREAK_ Q: What will you watch out for when you meet him on July 30? Kaul: We will have to look at their language very carefully given the intent of the RBI for the future. For the economic revival, it is necessary that adequate liquidity is maintained in the system to generate demand and at the same time, softer interest rates are required for the long-term investments to come in. Of course for that stability of the rupee is very important. Q: You spoke about the near-term rates perhaps being higher not so much at least in the medium-term. What is likely to be the margin compression on the back of the cost of borrowing going up in near-term? How would the mark-to-market (MTM) look like or the hit that you will see in your bond portfolio in the coming quarter? Kaul: I am not able to talk for other banks. Certainly if the interest rates stay at these levels, there would be some hit on the MTM the bond portfolio. As far as the UCO Bank is concerned, we don’t have very large hit as we have not purchased much of the bond in the last couple of months. But our view is that, going forward, this high yield may not sustain for very long time. The moment RBI reverses those measures, yields will come down. We have also seen the 10-year yield-to-maturity (YTM) going down from almost 8.44 to 8.30 percent and slightly below that. It means the market is sure about these measures will not stay for a very long-term. The moment they change these measures, interest rates start coming down. Q: If that is the view, will you be a bond buyer assuming you are building your mutual fund portfolio? Is this a time to get into fixed debt funds if this is an unnatural low? Kaul: These are good levels to buy provided we have appropriate liquidity. Q: Arun Kaul was saying that he will only watch the RBI’s language and doesn’t expect action. What you will look forward to on July 30? Narayan: I agree with Arun Kaul almost entirely. I don’t think they need to do anything in the monetary policy right now. They have pretty much achieved what they want to achieve over the last eight days or so. Short-term rates will remain under pressure and they are all hoping and praying this for a short period of time. The actual impact will probably come in the fortnight starting the next week when it will straightaway hit another 0.25 percent. If the rupee does stabilise, hopefully these measures can be unwound over a period of time. The 8.5 percent levels on 10-year G-Sec and 10 percent and AAA corporates should be a cap. Those are probably good levels to buy for the medium-term. Q: Do you see the case for any rupee denominated bonds now by the RBI at least given the fact that the recent measures are taking some place? Is NRI or a sovereign bond on the cards? If it does come through, will it attract the same kind of interest that resurgent bonds did many years back given the challenges that the Indian economy is facing? Narayan: On this I prefer to take a more longer-term view rather than an immediate requirement because of a crisis. Fundamentally, it makes a lot of sense for the government to diversify sources of funds. It makes a lot of sense for the government to tap the external markets rather than have the private sector tap external markets. In many ways it ticks many boxes. Given there has been so much of discussion on NRI bonds, on sovereign bonds or maybe bonds through other entities backed by government guarantee or quasi government guarantee. Something can come through and should come through and it is probably a good thing in the long run to have other sources of diversified funds for the government. Q: What is your sense about how the credit growth will pan out? These four or six weeks is going to maim credit offtake considerably. Perhaps maim even the psyche of the people who want to go in for capex. Do you think that we can permanently damage what look or what may have been an incipient recovery later in the year? There were analysts who were calling for even 10-12 percent credit growth in the current year. Was that an alarmist cry or do you think it could still go that way? Kaul: Last couple of months have indicated that the credit growth was relatively slow. We don’t see many new projects coming up. Investors are slowing down. For investments and credit growth to pick up, it is very important that we are able to manage the current account deficit (CAD), provide stability to rupee and offer low rate of interest. Currently, there is slackening of credit if it was a busy season in credit. The busy season of credit starts in October and November. If you are able to stabilise currency, bring in lower interest rates and improve general environment, credit growth in the lines what RBI has projected can be achieved in the current year. Q: The dollar is as cheap as 58.79/USD gaining a good 20 paise as we were speaking or at least 15 paise. Would you be surprised if it ended at 58.50 per US dollar? Do you have any barriers, technically or otherwise? Narayan: It will remain volatile. I can assure you that things can change quickly but at the moment, rupee will remain with a positive sentiment given the strength of the measures taken by the RBI and that trend will probably remain for a while.