Re still overvalued, won't buy it now: Macquarie

The Indian rupee tanked to a fresh all-time low of Rs 53.75 per US dollar in early trade on Wednesday, thanks to the balance of payment (BoP) imbalances said Nizam Idris, Head - EM FX Strategy, Macquarie.

In an interview to CNBC-TV18 Idris said,"The rupee is incumbent by the twin deficit - current account deficit of around 3% of GDP and fiscal deficit of around 5% of GDP."

Idris feels that rupee is still overvalued and suggests that one should not buy rupee at the moment. However, he is bullish on the rupee over the longer term.

Below is the edited transcript of Idris' interview with CNBC-TV18. Also watch the accompanying video.

Q: Do you see this kind of trend of weakening in emerging market currencies versus the dollar continuing through 2012 the early part of it?

A: Emerging market currencies have held pretty well apart from the rupee. If you look at year to date performance for e.g. dollar Asia has gone up at an average of 3% only apart from the rupee; dollar rupee has been up 17% year to date. So to me it is a specific issue to the rupee. The main reason behind that is a fact that the rupee is incumbent by the twin deficit - current account deficit of around 3% of GDP and fiscal deficit of around 5% of GDP. India is the only market in Asia with twin deficit.

Q: You think its fundamental issue behind the kind of performance that we have seen for the rupee which makes it stand out in the emerging market basket?

A: The fact that this twin deficit makes it a currency where it has become highly dependent on capital flows and given risk aversion lately capital flows have slowed down drastically globally. So, we are talking about capital freeze globally which means that the current account deficit that we spoke about for India cannot be funded by capital inflows. Now the situation may remain pretty bad for now in India. In my view we could hit 55 in dollar rupee before there is some stability over there.

Q: What kind of stability would you expect, what kind of a range for the rupee dollar. Do you see it going back to those 46-47 levels anytime in the next few months?

A: Not in the next few months but there is a potential of longer term. I am bullish on rupee over longer-term but not in the short-term. The twin deficit will continue to hurt the rupee as long as global sentiment remains negative because that is when one does not get that flow from the capital account to fund the current account deficit. But to be fair, the current account deficit of 3% of GDP is not huge, many countries do have that and continue to see currency appreciation.

One example is the Australian dollar; the Australian dollar has remain strong despite 2-3% deficit in the current accounts. India requires an improvement in market sentiment where we could continue to see foreign direct investment coming into rupee. That will trigger appreciation of the currency. At this current level, I do not think that the currency is still overvalued. For me it is increasingly looking overvalued particularly in the longer term perspective and the dollar rupee breaking above 55 may make it a lot more enticing to go long on the rupee.

However, we need market sentiment to improve to significant appreciation. Therefore, 55 kind of level may see some stability. We could get that breakout kind of a trade if we get risk stop losses being triggered above 55 and then I would consider going short dollar rupee at levels above 55 if sentiment improve. For me the outlook for the rupee in 2012, at least for first half is slightly better than that. I am still forecasting 52 for dollar rupee by the end of first half of 2012.

Q: How do you map the euro dollar right now from this level of 1.3 on the euro, the dollar index is beyond 80 again, do you see this kind of trends getting more pronounced in the days to come?

A: Yes, euro is in a situation where uncertainty will prevail. It is difficult to think of the euro at 135 only a week ago despite the risk of breakup of euro zone and so on. So, the euro could continue to remain weak which will be supportive for the dollar directly.

But it also means is that one could see the euro coming under increasing pressure in the months ahead which could take it down to 120 before we get solution for the euro zone. My view is that the ECB will need to play a bigger role. By playing a bigger role it would require ECB to print money to monetise some of the periphery government debt. That would be negative on the euro for short-term.